Contents IFC About this report 1 Performance highlights for the year Integrated report 2 3 Our business and strategy Chairman’s statement 31 March 2017 4 Our business model 12 Operating environment 15 Strategy and outlook 19 Our leadership 24 Stakeholder engagement and material matters 28 Risks and opportunities, assurance and controls 34 Operating performance 35 Executive overview 37 Revenue and customer sustainability 42 Operational sustainability 53 Sustainable asset creation 59 Environmental and climate change sustainability 63 Safety and security 66 Building sustainable skills 69 Transformation and social sustainability 73 Financial review 74 Chief Financial Officer’s report 76 Value added statement 77 Condensed annual financial statements 81 Key accounting policies, significant judgements and estimates 83 Financial sustainability 92 Our governance 93 Governance and ethics 94 Board of Directors and committees 96 Executive Management Committee 98 Executive remuneration and benefits 99 Supplementary information 100 Abbreviations and glossary of terms 103 Eskom’s energy flow diagram 104 Statistical tables 110 Customer information 112 Plant and benchmarking information 119 Environmental implications of using electricity 120 Board and Exco meeting attendance 122 Independent sustainability assurance report 126 GRI G4 indicator table 130 PAIA declaration 131 Contact details 132 Our suite of reports www.eskom.co.za Enabling economic growth www.eskom.co.za Navigation icons About this report Performance highlights for the year The following navigation icons are used to link our sustainability dimensions and strategy to material matters, strategic risks, key performance indicators and performance: Board responsibility and approval The Board is accountable for the integrity and completeness of the integrated report and any supplementary information, and is assisted by the Audit and Risk Committee and the Social, Ethics and Sustainability Committee. Financial sustainability The Board has applied its collective mind to the preparation and presentation of the integrated report and has concluded that it is presented in accordance with the International Framework. In considering the Revenue and customer sustainability completeness of the material items dealt with and the reliability of information presented, based on the combined EAF improved to Connected 77.3% 207 189 assurance process followed, the Board approved the 2017 integrated report, annual financial statements and supplementary information on 15 June 2017. Operational sustainability Mr Zethembe Khoza Ms Chwayita Mabude Dr Pathmanathan Naidoo households Sustainable asset creation Interim Chairman Interim Chairman: Audit and Risk Chairman: Social, Ethics and Committee Sustainability Committee Environmental and climate change sustainability Reporting boundary and frameworks to address mainly material matters, both positive and This integrated report reviews our operational, negative, in this integrated report. environmental, social and financial performance for The content is further guided by legal and regulatory Safety and security the year from 1 April 2016 to 31 March 2017, and requirements, such as the Companies Act, 2008 and follows our 2016 integrated report. Material events up to the date of approval have been included. For a the King Code on Corporate Governance in South Ingula added Synchronised 1 332MW Africa (King III), as well as global best practice. We Building sustainable skills comprehensive overview of our financial performance, the integrated report should be read in conjunction are assessing the impact and preparing to apply the Medupi Unit 5 and recently issued King IVTM in the coming year. The with our full set of group annual financial statements. report also contains some GRI G4 disclosures. Kusile Unit 1 Transformation and social sustainability Our group annual financial statements are available online at The GRI G4 indicator table is available as a fact sheet at the back of installed peaking capacity www.eskom.co.za/IR2017 this report The report examines our performance and Building a solid reputation considers the impact of stakeholders on our ability Assurance approach to create value, as well as our impact on them. Unless Our combined assurance model relies on three lines otherwise indicated, the information presented is of defence. The Audit and Risk Committee and Board comparable to that of prior years, with no significant rely on combined assurance in forming their view of restatements. The information in this report refers the adequacy of our risk management and internal Request for feedback controls. to the performance of the group, which includes the We want to ensure that our report continues to provide business of Eskom Holdings SOC Ltd, operating in Export sales Total coal cost relevant information. We welcome your feedback on ways Our strategic risks are discussed on page 29 in which we could improve our report. Please send your South Africa, and its major operating subsidiaries, unless otherwise stated. growth of increase limited to 12.1% 5.4% suggestions to IRfeedback@eskom.co.za The entire report has been internally assured by our Assurance and Forensic Department. The Our business model on pages 8 and 9 provides more detail on our value creation process sustainability KPIs contained in the shareholder compact were subject to external assurance; all but Supplementary Additional information Basis of preparation four have received reasonable assurance. information in a in this report fact sheet Our integrated report is based on the principles contained in the International Integrated Reporting The combined assurance of our suite of reports is set out on Information Refers to GRI page 33 available on Framework (the International Framework) disclosure our website published by the International Integrated Reporting Council (IIRC). The report seeks to provide a balanced The independent sustainability assurance report is included on and transparent assessment of how we create value, pages 122 to 125 A list of abbreviations and glossary of terms are available at the back of this report (pages 100 to 102) considering both qualitative and quantitative matters that are material to our operations and strategic The consolidated annual financial statements EBITDA Borrowing requirement Throughout this integrated report, performance objectives, which may influence our stakeholders’ have been audited by the group’s independent auditors, SizweNtsalubaGobodo Inc. who issued a improved to reduced by approximately R37.5bn R10bn decision-making. against target is indicated as follows: qualified opinion relating to compliance with PFMA and completeness of irregular expenditure. The The determination of material matters is set out on page 27 Actual performance met or exceeded target consolidated annual financial statements are fairly Actual performance almost met target (within a presented, except for the qualification. Although this is our primary report to stakeholders, 5% threshold) aimed at providers of financial capital, it provides Actual performance did not meet target Refer to the annual financial statements for the audit opinion information of interest to all stakeholders. We aim SC Indicates that a key performance indicator is included in the shareholder compact Eskom Holdings SOC Ltd A Chairman’s statement Our business and strategy Refer to “Strategy and outlook” on pages 15 to 19 for more 3 Chairman’s statement information 4 Our business model Governance Our business and strategy 12 Operating environment To ensure transparency and objectivity, the Board has 15 Strategy and outlook embarked on a comprehensive independent review of 19 Our leadership various reports pertaining to perceived governance issues – the State of Capture report issued by the 24 Stakeholder engagement and Office of the Public Protector, draft reports issued by material matters National Treasury following a review of contracts, and 28 Risks and opportunities, assurance the Dentons report, amongst others. Areas of concern and controls Our strategy broadly relate to procurement, contract management Eskom’s key roles remain assisting in lowering the cost and governance. This review follows internal reviews of doing business in South Africa, enabling economic to ensure that all perceived gaps are covered. growth and providing a stable electricity supply in an efficient and sustainable manner. We also contribute The Board is confident that significant progress to job creation, skills development, transformation has been made in addressing findings and and broad-based black economic empowerment recommendations. The Audit and Risk Committee (B-BBEE), in support of the National Development will provide oversight of management’s continued Plan (NDP) and other country initiatives. efforts to implement the action plan to improve the control environment in a sustainable manner. Last year, we launched a comprehensive turnaround strategy, which included the Design-to-Cost (DTC) Outlook and conclusion strategy, aimed at leading Eskom and South Africa The execution of our strategy is dependent on into an era of reliable power supply and excess three key enablers, namely governance that drives capacity, while supporting economic growth accountability, successful stakeholder management through moderate tariff increases over the medium and effective risk mitigation strategies, particularly to long term. Despite the challenges over the past to respond to lower than budgeted tariffs. few years, DTC has delivered significant efficiencies, supporting the turnaround of the business. We can We remain committed to connecting independent now move from stabilisation to growth. power producers (IPPs) up to bid window 4.5, as long as they are economical at a price of 77c/kWh or We are proud of the major progress the strategy lower, given our surplus capacity. Any further IPPs delivered in its first year of implementation, as will need to be assessed against a holistic framework Eskom achieved the required stability to deliver on a of security of supply, electricity price, environmental number of important objectives for South Africa and benefits and socio-economic factors, to ensure that the SADC region, including: the programme is rolled out at a cost and pace that • Ensuring reliable electricity supply through is optimal for both South Africa and Eskom. improved generation asset performance • Delivering additional new build capacity We extend our condolences to the friends and • Supporting moderate electricity price increases family of those who lost their lives serving Eskom. through cost efficiencies across the business, particularly in primary energy I thank our current directors, as well as those • Increasing universal access to electricity by connecting who stepped down over the past year – Ms Nazia more than 200 000 households to the grid Carrim, Ms Viroshini Naidoo, Mr Mark Pamensky, • Enabling growth in the region by supplying more Ms Venete Klein and Dr Baldwin Ngubane. Also electricity to our neighbouring countries facing to the Honourable Minister Lynne Brown, our harsh drought conditions shareholder representative, and her team for their • Successfully executing our funding plan continued guidance. We have further refined the strategy, to catalyse I congratulate the members of Exco for their economic growth in South Africa and the region supreme efforts in proving that we can deliver against through moderate tariff increases over time, by an ambitious plan, with the notable improvement in creating sustainability in our existing business, while operational and financial performance this past year. laying the foundation for the Eskom of tomorrow. Our These successes have strengthened the Board’s overall objective over the medium term is to achieve confidence that the organisation can deliver on a a standalone investment-grade credit rating to reduce strategy that will see Eskom once again take centre the burden on the fiscus, while ensuring reliable and stage as a catalyst for economic growth in South competitively priced electricity for the country. Africa and the region. The strategy is based on aggressive sales volume growth by stimulating industrial activity, coupled with efficiency improvements across the business, to ensure a tariff path that supports the economy. Zethembe Khoza We aim to achieve our objectives by driving seven Interim Chairman strategic initiatives, by focusing on five critical targets. Our strategy will enable us to manage the impact of the 2.2% price increase for one year. Eskom Holdings SOC Ltd 3 Our business model Our mandate, vision and mission we produce waste in the form of ash and nuclear Eskom Holdings SOC Ltd is South Africa’s primary waste, as well as gaseous and particulate emissions. electricity supplier and generates approximately As part of the process, we balance supply and Our business and strategy 90% of the electricity used in South Africa, and demand in real time. approximately 40% of the electricity used on the Our value chain consists of core operations, backed African continent. We are a state-owned company (SOC) as defined in by support functions in the form of finance, human resources, procurement, information technology, We operate the Companies Act, 2008, and are wholly Government owned, through the Department of Public Enterprises (DPE). As such, we are subject to the Public Finance stakeholder management and communications. Our core operations include the generation, transmission, distribution and sale of electricity, as well as the 29 power stations Management Act (PFMA), 1999, and the provisions of our Memorandum of Incorporation (MOI). construction of new power stations and network infrastructure. Safety underpins our operations – we Total nominal capacity of 44 134MW remain committed to maintaining a safe, healthy working Mandate environment for all employees and contractors. The Minister of Public Enterprises (the Minister) sets The electricity supply industry 36 441MW 1 860MW 2 409MW 2 724MW 600MW 100MW the overall strategic direction in the Strategic Intent South Africa’s electricity supply industry comprises of coal-fired of nuclear of gas-fired pumped hydro Sere Wind Statement, which forms our mandate. Our key roles the generation, transmission, distribution and sale of stations power stations storage stations Farm are assisting in lowering the cost of doing business in electricity, including the import and export thereof. stations South Africa, enabling economic growth, and providing a stable electricity supply in an efficient and sustainable Eskom operates most of the base-load and peaking manner. Through our activities, we also contribute to capacity, although the role played by IPPs is expanding. job creation, skills development, transformation and All four units of Ingula, Our stations include We maintain approximately broad-based black economic empowerment. For more information on the capacity added and energy supplied by with a nominal capacity four small hydroelectric To implement this mandate, our annual Corporate IPPs, refer to pages 49 to 51 of 331MW each, were commissioned during stations, which are installed and operational, but not 384 712km Plan sets out our strategic and operational direction. NERSA, as South Africa’s energy regulator, regulates the year, supplementing considered for capacity Power lines It gives effect to our medium- to long-term strategic the electricity industry as mandated chiefly by the the capacity added by management purposes objectives, while the annual shareholder compact set by DPE outlines the annual key performance Electricity Regulation Act, 2006 and the National Energy Regulatory Act, 2004, by providing licences, Unit 6 of Medupi Power Station, commissioned 276 583MVA indicators (KPIs) in support of our mandate and Substation capacity regulatory rules, guidelines and codes. in the previous year strategic objectives. NERSA determines our revenue requirement Performance against the 2016/17 shareholder compact is set out in based on multi-year price determination (MYPD) the directors’ report in the annual financial statements, available online applications we submit, considering the requirements of the Electricity Pricing Policy. The third revenue The Minister receives the Corporate Plan and application, MYPD 3, is currently in effect and Further information on our power stations, power lines and substation Through our Southern African Energy Unit, we import approves the shareholder compact before the start covers the five-year period from 1 April 2013 to capacities is available as a fact sheet at the back of this report electricity from Lesotho, Mozambique, Zambia and of each financial year. The latest Board-approved 31 March 2018. Zimbabwe, and sell electricity to Botswana, Lesotho, plan spans the five-year period from 1 April 2017 to We supply electricity in bulk to distributors (metros Mozambique, Namibia, Swaziland, Zambia and The National Nuclear Regulator (NNR) regulates and municipalities). The electricity produced by 31 March 2022. Zimbabwe. Koeberg, our nuclear power station, by ensuring Eskom and municipalities is distributed to business that individuals, society and the environment are and residential customers in areas of supply licensed Our capacity expansion programme, which Shareholder compact KPIs are noted throughout the report using SC. These KPIs are also included in the statistical tables, available as a fact adequately protected against radiological hazards to either Eskom or metros and municipalities. We also commenced in 2005 and is expected to be completed sheet at the back of this report associated with the use of nuclear technology, and supply to industrial, mining, commercial, agricultural by 2022, is adding capacity through new power that Koeberg complies with nuclear safety standards. and directly to a number of residential customers stations, high-voltage power lines and substation Vision and mission in South Africa, as well as a number of international capacity, to assist in meeting South Africa’s growing Nature of our business and customer base In support of our vision statement of “Sustainable customers in the SADC region. energy demand and strengthen our grid. We are vertically integrated across a value chain power for a better future”, our mission remains to that supplies electricity to both South Africa and the provide sustainable electricity solutions to foster Southern African Development Community (SADC) economic growth and social prosperity. region. The Southern African Power Pool (SAPP) is Our business model and the value connected through an integrated grid, and comprises we create South Africa, Botswana, Lesotho, Mozambique, Eskom creates value for itself, its shareholder and Namibia, Swaziland, Zambia and Zimbabwe. stakeholders, by transforming inputs in the form Eskom’s business follows the South African economy’s of primary energy – namely coal, nuclear and liquid boom (surplus) and bust (deficit) cycles. The long fuels, while using significant amounts of water – into lead times needed to build new power stations or a more convenient form of energy, being electricity, transmission networks can lead to misalignment which is supplied to customers who use it to power between power supply and economic cycles. their homes and businesses, thereby contributing to economic growth and prosperity. In so doing, 4 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 5 Our business model continued During 2016/17, we supplied energy output of Our impact on the capitals 220 166GWh from the following primary energy Our sustainability dimensions are aligned to the six sources: capitals in the International Framework. These Our business and strategy dimensions are integrated and incorporate all aspects Target Delivered Source GWh of our business and the value that we create over time. Coal-fired stations 200 893 We use natural capital in the form of coal, liquid fuels, Nuclear power 15 026 Generating uranium and a significant amount of water as primary capacity 17 384MW 8 363MW Pumped storage stations Hydro stations 3 294 579 energy sources to generate electricity in our various Wind 345 power stations. Open-cycle gas turbines (OCGTs) 29 High-voltage Electricity generation results in waste, such as gaseous transmission 9 756km 6 747km Total 220 166 and particulate emissions, ash and nuclear waste, thereby negatively impacting natural capital. In order to lines After accounting for energy losses, we sold reduce our impact on natural capital, we are gradually Substation 214 121GWh of electricity to a total of 5 976 557 transitioning to a cleaner energy mix, including nuclear capacity 42 470MVA 34 390MVA customers. energy, clean coal technologies and renewable energy, the latter provided mainly by IPPs. For electricity sales by customer segment, both volumes and revenue, as well as the number of customers by segment, refer to the fact Our power stations, together with our transmission sheet at the back of this report and distribution networks, make up our manufactured capital.This is eroded through the process of using our Generation capacity delivered plant to generate, transmit and distribute electricity, while it is restored to some extent through planned and unplanned maintenance, and refurbishment. Return-to- Open-cycle Sere Wind Ingula Pumped Medupi Depreciation is a financial approach to account for the service stations gas turbines Farm Storage Unit 6 erosion of manufactured capital. Camden, Ankerlig and Scheme Grootvlei and Gourikwa All four units Komati commissioned Our sustainability dimensions The six capitals Financial sustainability MC Manufactured capital Eskom’s energy wheel Our energy flow diagram, or energy wheel, shows the electricity that flowed from local and international power stations and IPPs to Eskom’s distribution and export points, including energy losses incurred in reaching our Revenue and customer customers. sustainability FC Financial capital Electricity available for distribution GWh Electricity demand GWh Operational sustainability Generation 220 166 Local sales 199 028 Less: Pumping (4 808) International sales 15 093 IC Intellectual capital Generated by Eskom 215 358 Total sales 214 121 Sustainable asset creation IPP purchases 11 529 Technical and other losses 21 399 International purchases 7 418 Internal use 460 Wheeling1 2 910 Wheeling1 2 910 Environmental and climate change sustainability NC Natural capital Unaccounted (1 675) Available for distribution 237 215 Total demand 237 215 Safety and security 1. Wheeling refers to the movement of electricity between international customers through our network, without the power being available to customers on the South African grid. HC Human capital Building sustainable skills The detailed energy flow diagram, with comparatives, is available as a fact sheet at the back of the report Transformation and social sustainability SRC Social and relationship capital 6 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 7 Sun Our business model 50Hz Wind RENEWABLE Water Agriculture Wind turbines Hydro Rail Solar Mining Operating performance IPPs Distribution line NON-RENEWABLE High-voltage transmission line Nuclear plant Substation Coal mine Industrial Commercial DIESEL DIESEL Municipalities DIESEL DIESEL DIESEL Residential OCGT Coal-fired plant Substation PRIMARY ENERGY POWER GENERATION TRANSMISSION DISTRIBUTION CUSTOMERS INPUTS PROCESS OUTPUTS CUSTOMERS NON-RENEWABLE NC 113.74Mt Coal burnt RENEWABLE NC 74 days Coal stock POWER GENERATION MC 3.80 System minutes lost <1 237 215GWh Electricity DISTRIBUTION TRANSMISSION SRC available for distribution SRC 214 121GWh Total sales NC 10Mℓ Liquid fuel used MC Energy availability (EAF) 77.30% SRC Interruption frequency (SAIFI) NC 32.6Mt Ash produced 18.9 events 41.9% Municipalities 5.5% Residential NC 307 269Mℓ Raw water used MC Planned maintenance (PCLF) 12.14% NC 211.1Mt CO2 emissions SRC Interruption duration (SAIDI) 22.6% Industrial 4.8% Commercial MC 29 Power stations 65.1kt Particulate emissions MC Unplanned losses (UCLF) 9.90% 38.9 hours NC 14.3% Mining 2.5% Agriculture MC 384 712km Power lines 8.85% Total energy losses SRC IPP purchases 11 529GWh SRC 7.1% International 1.3% Rail HC 47 658 Group employees 0.39 Group LTIR HC FC Electricity revenue R175.1 billion FC Capital expenditure R60 billion FC Municipal arrear debt R9.4 billion OUTCOMES FOR ESKOM OUTCOMES FOR OTHERS FC EBITDA R37.5 billion FC External funding raised R57.4 billion FC Interest paid R28.8 billion SRC IPP capacity connected 5 027MW FC Electricity EBITDA margin 21.44% FC Debt/equity ratio 2.11 FC Cash interest cover 1.82 SRC Eskom KeyCare 107.0 FC Average electricity price 83.60c/kWh FC FFO as % of gross debt 11.69% FC Debt repaid R7 billion SRC Electrification 207 189 households connected FC Electricity operating costs R677.91/MWh FC FFO as % of total capex 75.11% FC Debt service cover ratio 1.37 SRC CSI committed spend R225.3 million MC Maintenance expenditure R14.1 billion MC Medupi Unit 5 and Kusile Unit 1 synchronised HC Employee benefit costs R33.2 billion SRC 85.78% Local sourcing in new build MC Depreciation expense R20.3 billion MC All four Ingula units commissioned HC Learners – engineers (1 480), technicians (1 209), SRC 98.25% B-BBEE compliant spend artisans (2 155) FC BPP savings R20.2 billion MC 585.4km Transmission lines installed HC Racial equity in senior management 65.80% HC Training spend 4.89% FC Liquid assets R32.5 billion MC Distribution capex for strengthening and HC Gender equity in senior management 36.58% refurbishment R2.9 billion NC Relative particulate emissions 0.30kg/MWhSO FC Working capital ratio 0.85 HC 1 396 Group employees with disabilities NC Specific water consumption 1.42ℓ/kWhSO For a discusssion of performance against target of the abovementioned KPIs, refer to “Operating performance” and “Financial review” HC Employee and contractor fatalities 10 88 Integrated report Integrated | 31 March report 2017 2017 | 31 March Eskom Holdings SOC Ltd 9 Eskom Holdings SOC Ltd 99 Our business model continued As part of the process of generating and supplying We contribute further to building social and Legal structure electricity to customers, we employ human capital, in relationship capital through our corporate social The Eskom group consists of the Eskom business and Eskom Enterprises SOC Ltd (EE) has a subsidiary in the form of our employees’ competencies, capabilities investment (CSI) activities, which are administered by a number of operating subsidiaries. Our head office is Uganda. Under a 20-year concession arrangement, Our business and strategy and experience. Our human capital is enhanced by the Eskom Development Foundation (the Foundation). based in Johannesburg, although we have operations now in its fourteenth year, Eskom Uganda Limited is training, whether theoretical or practical, as well as the across South Africa, with administrative offices in most responsible for the operation and maintenance of two development of learners as part of our skills pipeline. Since the commencement of our electrification major centres. hydroelectric power stations at Nalubaale and Kiira. We aim to recruit, develop and retain a highly skilled, programme in 1991, we have electrified more than committed, engaged and accountable staff base. We 5 million households within our licensed areas of supply. The office we had in London, primarily for quality The map on page 113 shows the geographic location of our power have set targets to achieve the optimal headcount and stations and transmission lines control of equipment being manufactured for the We depend on a licence to operate from NERSA, but skills mix to capture efficiencies and employee-related capacity expansion programme, was closed down on also on community support, in those communities cost savings across the business, while striving for 30 June 2016. That function is now managed locally. directly impacted by our operations. We rely on racial and gender transformation. strong stakeholder relationships, to support us in our Our group structure (only major operating subsidiaries are shown) value creation process. For further information on our workforce and employment equity, refer to “Building sustainable skills” on pages 66 to 68 and “Transformation and social sustainability – Improving internal The impact of stakeholder support in practice transformation” on page 72 A recent example of the influence of stakeholders and Eskom Holdings SOC Ltd Eskom Pension the impact on Eskom is the revenue determination and Provident Our intellectual capital consists of technology, for the 2017/18 financial year. Eskom submitted the Fund organisational knowledge, systems, policies Regulatory Clearing Account (RCA) application for Eskom Enterprises Eskom Finance Escap SOC Ltd Eskom Development SOC Ltd Company SOC Ltd Foundation NPC and procedures. Technology is a key enabler of 2013/14 (year one of MYPD 3) of R22.8 billion to our business and includes telecommunications, NERSA in November 2015. NERSA undertook a public information technology, research and innovation. An consultation process, affording various stakeholders Eskom Rotek Industries SOC Ltd Eskom Uganda Limited Pebble Bed Modular Reactor SOC Ltd South Dunes Coal Terminal Company SOC Ltd example is our Tetris planning tool, which assists in the an opportunity to comment on our submission. This optimal scheduling of maintenance. We research ways included written comments from the public as well to improve our processes and technologies as well as public hearings in six provinces, during January and as reduce our impact on the environment, and invest February 2016. The public raised concerns on various in pilot projects to investigate the feasibility of larger aspects of the application. NERSA allowed a balance of There have been no changes to the structure of the group, although the following should be noted: scale rollout. Our research also focuses on future R11.2 billion to be recovered, resulting in an average • A number of EE’s dormant subsidiaries are in the process of being wound down technologies such as battery storage capabilities. price increase of 9.4% for the 2016/17 financial year, • Eskom Finance Company SOC Ltd (EFC) has not been disposed of as anticipated, but is still treated as held- compared to 8% originally awarded under MYPD 3. for-sale. We are engaging with the market to find an appropriate disposal solution, as requested by our We require financial capital to fund our business, shareholder which is either increased or diminished by our In the Borbet case, the Port Elizabeth Chamber of • The Foundation will be absorbed into Eskom from 1 April 2017 financial performance and the progress on our funding Commerce and others requested the North Gauteng plan. Our financial capital consists of equity in the High Court to review NERSA’s decision regarding the We provided information on our major operating subsidiaries on page 28 of our 2016 integrated report. Details of subsidiaries at 31 March 2017 form of equity invested by the shareholder, retained 2013/14 RCA application. On 16 August 2016, the are available in note 12 of our annual financial statements earnings and debt funding, which is supported by High Court set aside NERSA’s decision and remitted Government guarantees of our borrowings where it back to NERSA. Contribution to financial performance required by lenders. Our credit rating is affected by An appeal against the decision by NERSA and Eskom Each of the companies in the group contributes to the financial performance and position as follows. The Eskom our own financial position as well as the credit rating was heard in the Supreme Court of Appeal (SCA) on business remains by far the most significant. of the Sovereign; both credit ratings have deteriorated over the past year. 4 May 2017; the judgment on 6 June 2017 upheld the Elimi- appeal in favour of NERSA and Eskom. Eskom EE Foun- nations Eskom At 31 March 2017, our equity totalled R175.9 billion, R million company group Escap EFC dation & other group of which R83 billion is attributable to share capital Due to the judicial process, NERSA has decided not to and the rest to retained earnings, while lenders consider further RCA applications. This means we will Revenue 177 136 9 799 3 158 880 – (13 837) 177 136 and investors (bond holders) had provided funding now only be allowed 2.2% for the 2017/18 financial EBITDA1 35 989 837 2 352 155 3 (1 804) 37 532 of R355.3 billion in the form of debt securities and year, which is well below inflation of approximately Net (loss)/profit after tax (870) 469 2 141 120 – (972) 888 borrowings. As all funds generated are reinvested in 6%, although we had budgeted for an average increase Total assets 701 550 8 174 9 805 8 806 172 (18 498) 710 009 the business, we generally do not pay dividends to of 13%. This creates a revenue shortfall and cash flow Total liabilities 535 586 3 339 4 694 7 874 172 (17 598) 534 067 our shareholder, although lenders and investors earn deficit of approximately R21 billion for the year, which Capital expenditure2 65 942 1 091 – – – (455) 66 578 a return in the form of interest paid, coupled with the will result in a weakening of all our financial ratios, repayment of debt. which may further impact our credit ratings. 1. EBITDA excludes fair value adjustments on financial instruments and embedded derivatives. 2. The company and group figures include DoE funded capital expenditure of R3.3 billion. Through the provision of electricity, we have a positive Furthermore, an increase of 3% was required for IPPs, For our segment disclosure, refer to note 7 in the annual financial statements impact on social and relationship capital, as we not which implies a “negative” increase for Eskom, which only enable economic growth, but contribute to can only be supplemented by significant cost cutting job creation, skills development, transformation and in order to earn a reasonable return. We will attempt broad-based black economic empowerment. to reduce the revenue shortfall through increased efficiencies and further trade-offs across the business. 10 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 11 Operating environment Government’s National Development Plan remains the past year on Standard and Poor’s (S&P) index. Rapidly changing dynamics in the global power Regionalisation and greater local collaboration the guiding document for economic growth, but In addition, the global macroeconomic outlook sector Regionalisation and greater local collaboration is without sustainable and sufficient electricity indicates a potential risk of increasing yields in The increased competitiveness of renewables expected to play a bigger role. Regional power pools Our business and strategy capacity, further economic growth will be hampered. emerging market bonds. An effective funding strategy and growth in their market share have created a are well developed in the EU, where they contribute As the base-load supplier in the market, we are is necessary to manage pressure on the sources and challenging situation for traditional fossil fuel-based to base-load capacity requirements, increase the directly responsible for enabling GDP growth. This cost of funding. utilities, forcing them to adapt their operating models. security of supply and provide cost efficiencies. requires increased capacity to support expected In Europe, power sector profits declined significantly future demand. We are building capacity to ensure Consumer inflation and interest rates as cheaper renewables gained market share. A regional development focus, strong policy that South Africa’s future energy needs are met. We Headline consumer price inflation has breached support and accommodating regulatory trading expect sustained surplus capacity in South Africa the upper limit of the inflation target range since In response, European utilities sought to shift their environments are required to develop power pools. over the next five years, as our plant performance September 2016 and accelerated to 6.8% in business models to a growing share of large-scale As the sole transmission licensee in South Africa, continues to improve and additional capacity is December 2016, before moderating marginally in renewables and small-scale distributed generation. In Eskom is responsible for developing and maintaining commissioned, from both IPPs and our new build January 2017. Although average inflation is expected South Africa, the RE-IPP (renewable independent power the country’s transmission and our distribution programme. to decline going forward, interest rates are not producer) Programme has successfully driven growth infrastructure, and South Africa’s interconnectors expected to reduce in the near future. in renewables capacity over the last five years. The within the region. We play a key role in the Southern It is important to recognise the macroeconomic country will need to seriously consider the electricity African Power Pool and expect to collaborate climate and utility sector context in which we Demand outlook supply-demand balance when considering further IPP further with our regional partners. operate, as these directly influence our strategy. Demand in global developed economies has declined capacity beyond bid window 4.5, as it impacts the plant This context poses a number of risks to which we by 1.4% a year since 2010. Because of regulatory mix required to ensure security of supply as well as the Updated Integrated Resource Plan (IRP) need to respond. However, it also presents a number pressure and investment in efficiency programmes and operating reserve margin. The IRP sets out South Africa’s long-term energy needs of exciting opportunities that we can capitalise on to increase in self-generation, demand for electricity in and discusses the generating capacity, technologies, strengthen the organisation and plant the seeds for the European Union (EU) has declined by 1.5% a year Discontinuities in technology create both timing and costs associated with meeting that need. the Eskom of tomorrow. since 2010. Similarly in the USA, demand has been opportunities and threats The existing nuclear programme scope is aligned to stagnant since 2010. In the long term it is anticipated Multiple new technologies will disrupt the electricity the current IRP 2010 which calls for 9 600MW of Macroeconomic climate that the EU 2050 strategy to reduce carbon emissions value chain. The cost of energy storage is expected nuclear power capacity. The draft IRP 2016, recently A challenging macroeconomic landscape with by 80–95% will have further implications for to decline by approximately 20% over the next issued by the Department of Energy (DoE), calls for pockets of real opportunity technology choices. four years as investment in this technology grows 20 385MW of nuclear power by 2050. Sufficient time Global economic growth has slowed to approximately rapidly. When it becomes viable, energy storage is required to properly plan and implement new base- 2.6% a year; the outlook for the next five years is for Electricity consumption in sub-Saharan Africa is has the potential to increase the competitiveness load power stations; implementation decisions need continued low growth of 3.4% a year. South Africa’s expected to quadruple by 2040, driven primarily by of renewables even more and change customers’ to be made long before commercial operation. GDP growth slowed to less than 1% in 2016. This has a five-fold increase in GDP, through doubling of the consumption behaviour. Our continued growth had a significant impact on Eskom’s key customers population and growing urbanisation. Currently, the will be further enhanced by creating new business and their ability to increase, or even maintain, their average access to electricity in sub-Saharan Africa opportunities in the storage sector. electricity consumption. In 2017, GDP is expected to is 20%; only seven countries (Cameroon, Côte d’Ivoire, Gabon, Ghana, Namibia, Senegal and South In South Africa, the penetration of small-scale grow at just 1.2% with no immediate signs of recovery. Africa) have electricity access rates exceeding 50%. generation has already increased considerably as In the SADC region, economic growth has also been This is much lower than in North Africa, where the cost of rooftop solar photovoltaic (PV) panels affected by regional challenges such as drought. electrification rates are over 98%. To meet growing continues to decline. The potential to increase Despite these challenges, the opportunities in the demand, electrification rates in sub-Saharan Africa distributed generation is close to a tipping point, local and regional macroeconomic landscape suggest are expected to reach 70% by 2040. creating new opportunities for Eskom to play a role that there is large latent and unserved electricity in the shifting energy landscape. However, this also demand in the region which Eskom can meet. In South Africa, power consumption has declined brings with it challenges associated with net metering Signs of improvement in commodity markets by 0.5% a year on average since 2006. The decline and safety of technicians working on networks which although volatility continues was highest in large power users, declining by could be live. Most major commodities have experienced a approximately 1.7% a year over the last five to 10 years, due to a wide range of factors, including economic Customer experience and satisfaction are significant decline in price over the past decade. In slowdown, commodity market volatility, increasing moving to centre stage addition, commodity price volatility has increased electricity costs and a lack of security of electricity With increased competition from renewables, greater significantly, adding to the risks involved in capital and supply. However, Eskom is now in a position to meet customer choice, and new technology changing growth decisions for metals and mining players. As the demands of the country with surplus capacity and consumption patterns, utilities increasingly need a result South African metals and mining companies take an active role in catalysing industrial growth. to better understand the customer journey and have reduced production in a number of sectors, preferences. such as gold, platinum and ferrochrome, with energy- Power sector trends intensive consumers having slowed their production Globally, the last five years have been challenging Digital enablement, process automation and and consumption by 1.7% a year over the past five for traditional power utilities, which have suffered big data-driven decisions to 10 years. With a few commodities experiencing significant declines in market share and profitability. Data and analytics are a new source of value improved prices over the last year, Eskom has a real A number of market and demand trends have reshaped creation and competitive advantage. Globally, leading opportunity to collaborate with the mining and heavy the global energy sector landscape dramatically. companies are building deep capabilities in data industrial sectors to capitalise on the current upcycle. Although the implications for South Africa and Eskom science and analytics to achieve the next efficiency are still uncertain, what is clear is that we will need horizon and create new business models. There are Impact of credit ratings downgrades to prepare to operate in a world in which traditional already multiple use-cases in predictive maintenance South Africa recently experienced a ratings downgrade, utilities’ business models will come under pressure, and field force effectiveness. Our new build programme has expanded transmission lines by which could have a significant impact on the economy 6 747km and substation capacity by 34 390MVA since inception and its growth outlook. Eskom’s long-term corporate and in which we will need to adapt our business model credit rating has also been downgraded twice in and take innovative steps to meet customer needs. 12 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 13 Operating environment Strategy and outlook continued The draft IRP 2016 is based on electricity demand pressure, although the SCA judgment should have a In the previous year, we set out to re-establish Eskom As discussed earlier, we have to operate in a growth rates of about 2% a year, compared to 3% positive impact. as a catalyst for economic growth in South Africa by challenging macroeconomic landscape with continued per year in the IRP 2010. Our latest Corporate Plan improving electricity availability. The Board approved volatility in commodities, despite some signs of Our business and strategy pursues average sales growth of 2.3% per year, across Refer to the information block on page 88 under “Financial the Design-to-Cost (DTC) strategy as part of our improvement. Although pockets of real opportunity local and cross-border sales. sustainability” for more on the effect of the regulatory environment comprehensive turnaround strategy to deliver reliable for growth remain, so does pressure on sources and on our credit ratings power supply and excess capacity, while enabling cost of funding. The draft revised IRP has important implications for economic growth through moderate tariff increases Eskom, particularly around the shift towards lower Independent power producers over the medium to long term. We have the benefit of hindsight in understanding carbon-emitting energy sources, to meet agreements Electricity supplied by IPPs is increasing at a rate the potential implications of the power sector made at the United Nations’ COP 21 climate change above demand growth, which is negatively impacting In its first year of implementation, our strategy drove trends as they start to affect the South African conference in Paris, December 2015. The IRP will also primary energy costs and displacing Eskom- the business to achieve these objectives by enhancing electricity market. They offer exciting opportunities affect our generation plant life extension decisions, generated power, as the IPP cost is much higher the reliability of supply and creating excess capacity, but, if we fail to act on them, we will be under even with Generation set to complete a full review of its than the short-run marginal cost of our coal fleet. enabling us to support the SADC region; adding new greater financial and operational pressure. asset base and life extension and/or possible plant This is, however, only true when surplus capacity capacity to the grid under the new build programme; decommissioning strategy. The IRP provides guidance is available. Nevertheless, we accept that a mix of improving efficiencies across the business in Our strategy on the opportunities for greater regional development plant is needed to ensure security of supply and support of moderate electricity price increases; and The DTC strategy was adopted last year to extract and electricity imports outlined in the NDP. compliance with environmental regulations. connecting more than 200 000 new households to further efficiencies from the business, through the grid. reductions in primary energy, operating and capital Refer to the information block on page 46 under “Operational expenditure (opex and capex), to support moderate Eskom’s Integrated Strategic Electricity Plan (ISEP), sustainability – Generation performance” for more information on Going forward, we aim to build on this strong price increases. which was completed in March 2017, provides a long- the different types of generating plant start to ensure that we support South Africa’s term view of the future generation expansion needs of economic recovery and enable industrial growth We also said we would launch a set of strategic the country, comprising an optimal mix of generation New power stations across Southern Africa. In response to concerns programmes, in order to: technologies until 2050 to meet customer demand Although increasing capacity, the commissioning of raised by stakeholders and the change in economic • Ensure long-term revenue certainty and environmental requirements. the new power stations, Medupi, Kusile and Ingula, circumstances, we have refined our strategy, • Increase our generation availability and capacity, will increase the cost base as these stations need to to catalyse South Africa’s development through and avoid load shedding ISEP shows a need for new base-load plant by 2028; be staffed, insured and maintained. The depreciation • Optimise our capital portfolio through prioritisation moderate tariff increases over time, while achieving a total of 23 700MW is required by 2050, to be charge will also increase substantially. based on our core business a standalone investment-grade credit rating. This provided from coal-fired and nuclear plant. No more • Drive cost efficiencies to support a long-term strategy is based on the strategic objectives from than 15 300MW can be coal-fired due to the CO2 Managing surplus capacity electricity price path DPE’s Strategic Intent Statement and is defined limitation. For nuclear plant, the total overnight cost Due to the surplus capacity and the age of some of • Deliver a funding plan that leverages the full Eskom across seven pillars. should be between R72 000/kWe and R100 000/kWe our coal-fired stations, some stations may have to be balance sheet for the first unit, with further units reducing in cost. decommissioned earlier than originally anticipated. Our strategic context Although provision for decommissioning of stations As a state-owned entity, Eskom must implement In order to catalyse growth, increase electricity demand, Various renewable generation scenarios were is made, earlier decommissioning would result in an and accelerate industrial projects that were cancelled Government policy and strategy. Alignment between considered. The final ISEP calls for additional immediate acceleration of depreciation to comply or deferred during periods of load shedding, we realised our strategy and the shareholder’s expectations renewable generation by 2050, with solar PV of with International Financial Reporting Standards we need a more focused strategy, which remains aligned is critical to ensure that we fulfil our mandate and 23 000MW and wind of 42 000MW. (IFRS). Effectively, the remaining life of affected to the objectives we set last year – these are still deliver on Government’s expectations. stations will be reduced to zero. However, operating contained in the strategic initiatives we will be targeting. ISEP shows a significant requirement for gas-fired costs will also reduce as activities are ramped down Our overall strategic direction remains aligned to We haven’t changed direction; our strategy has merely generation to provide a flexible generation option during the decommissioning period. Staff will DPE’s Strategic Intent Statement, which has set a evolved in response to our changing environment to the system, although the gas supply arrangements assist with the decommissioning and thereafter number of strategic objectives: and stakeholder concerns, aiming to capitalise on the were not considered. be absorbed in other areas of the business. The • Provide reliable and predictable electricity in line opportunities discussed earlier. dismantling of plant and rehabilitation of coal mines with regulatory methodology, while striving for cost containment and improved operational efficiencies Our strategic objectives Outlook and implications for Eskom will have a significant cash flow impact. The strategy, approved by the Board, is based on The challenging operating environment is expected • Ensure and maintain a financially viable and No decision on the possible decommissioning of sustainable company aggressive sales volume growth by stimulating to continue to put pressure on our ability to deliver industrial activity, and efficiency improvements across strong financial and operational performance. stations has yet been made. Feasibility studies are • Reduce Eskom’s impact on the environment being undertaken to reassess the lifespan of our the business to ensure a tariff path that supports the through identifying, implementing or supporting Market demand power stations, to inform the available options, such economy. It is expected to transform the business options for low carbon-emitting generation and The continuing slowdown in the economy and the as cold reserve, lean preservation, mothballing or across multiple fronts, including capacity, cost and transportation opportunities availability of alternative energy sources are driving decommissioning of stations. manpower. • Consolidate our socio-economic contribution the stagnation and/or decline in electricity demand. to ensure alignment to national transformation Regulation Refer to page 47 for further information on the various options imperatives to unlock growth, drive industrialisation, available to manage surplus capacity create employment and support skills development Eskom’s current revenue determination cycle in terms of MYPD 3 concludes at the end of Sovereign credit rating the 2017/18 financial year. Due to legislative and Uncertainty regarding the stability of South Africa, consultation requirements, we have submitted a demonstrated by the recent downgrade of the one-year application for 2018/19 to NERSA. Sovereign to sub-investment grade, reduces our ability to raise adequate funding at historic interest rates, The judgment by the North Gauteng High Court given our dependency on Government guarantees to in the Borbet case created further ambiguity in the access certain sources of funding. tariff path and placed our liquidity under additional 14 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 15 Strategy and outlook continued Our strategic initiatives: the “seven pillars” 1. Become a customer-centric organisation 5. Innovation and transformation to create new OBJECTIVES The Board has set three key strategic objectives over the medium to long term: that stimulates demand revenue sources Our business and strategy • Partner with customers to lead South Africa’s • Develop both regulated and non-regulated economic recovery while ensuring local sales growth opportunities and drive growth in new 1 Enable growth and 2 Lay the foundation 3 Achieve  an growth of 2.1% a year businesses, like rooftop solar PV panels, through transformation for the Eskom of investment-grade • Focus demand stimulation on sectors that are our subsidiary, EE in South Africa and tomorrow, and credit rating, critical to the economy and aligned with the NDP • Partner with players in battery storage SADC, in support not only focus on thereby reducing • Increase export sales by 8% over the next five technology of the National sustainability in our the burden on years • Enable transformation in the coal mining industry, Development Plan existing business the SA fiscus, by by recapitalising cost-plus mines, optimising 2. Ensure the reliability and availability of reducing Government logistics and coal-contract mix, and supporting power capacity to support South Africa’s guarantees by black-owned suppliers economic growth R105 billion, while • Continue to drive operational excellence and • Ensure universal access to electricity maintaining a reliability efforts across our generation fleet moderate electricity 6. Drive value through new capabilities and and network through a combination of effective advanced analytics price path over time maintenance, performance improvements, and • Initiate advanced analytics and digitisation application of new technologies, such as advanced initiatives across the business, through smart analytics The strategy is built on seven strategic pillars that will help us achieve sustainability in grids, field force effectiveness tools, detection of • Achieve EAF of 80% by 2019/20 through our current business and set up the Eskom of the future, while ensuring that the funding non-technical losses and predictive maintenance. continued application of the Tetris maintenance strategy supports both objectives with financial prudence planning tool We have already delivered improvements using • Complete Medupi and Kusile on time and within advanced analytics at the Majuba coal mills budget • Strengthen our capabilities to improve EBITDA INITIATIVES The seven strategic pillars are: by R6 billion over the next five years • Drive growth by adding 8.7GW generation capacity, establishing 2 095km new transmission 7. Deliver a funding plan that ensures successful lines, purchasing approximately 14 500GWh per delivery of the strategy 1 Become a customer- 2 Ensure the reliability  3 Continue capturing year from IPPs • Deliver a R337 billion funding plan that reduces centric organisation and availability of efficiencies in • Increase access to electricity by achieving one our exposure to Government guaranteed debt, that stimulates power capacity to operating and capital million new customer connections to achieve an investment-grade credit rating demand support South Africa’s costs to achieve a 3. Continue capturing efficiencies in operating • Release R105 billion in Government guarantees economic growth sustainable tariff path and capital costs to achieve a sustainable to reduce pressure on the fiscus for the economy tariff path for the economy • Ensure that we are able to meet our capital • Reduce coal spend by a further R43 billion obligations and maintain sufficient liquidity Decarbonisation of Innovation and Drive value through compared to the previous Corporate Plan 4  5 6 the economy transformation to new capabilities and • Further reduce headcount and employee benefit costs, supported by a comprehensive We will drive the seven pillars while maintaining our create new revenue advanced analytics independent review of our operating model support of the country’s RE-IPP Programme, which sources • Optimise capex by a further R25 billion, although aims to increase renewables capacity while ensuring our capital portfolio has already been reduced that South Africa begins the journey to meet its Deliver a funding plan that ensures successful delivery of the strategy from R334 billion previously to R315 billion for COP 21 carbon emission targets. 7 the current five-year planning cycle, in support of our intent to deliver investment-grade ratios The IPPs we have connected to the grid have supplied • Consider decommissioning some power stations over 11GWh this year alone. In the medium term, due to the expected surplus capacity, in a way the dynamics and assumptions underlying the original ENABLERS Achieving our strategy will require focus on a number of clear enablers, including: that optimises coal, people and capital costs RE-IPP Programme have shifted, particularly with slower across our fleet growth in electricity demand and declining costs of • Target a sustainable tariff path, with average renewables technology. With expected surplus capacity 1 Governance 2 Effective 3 Effective risk increases of 8–10% per year over the longer of approximately 3 000MW by 2020/21, there is limited   setup that stakeholder mitigation term, although higher increases may be required opportunity to connect new IPPs to the grid unless they drives effective management to strategies, initially are economical at a price of 77c/kWh or lower. accountability ensure the right level particularly to • Improve recovery of revenue from non-paying across the business, of advocacy and clear mitigate the risk of customers In the long term, as the costs of renewables particularly communication with lower than budgeted decline further and the South African economy 4. Decarbonisation of the economy leadership. We will major stakeholders. tariffs shows strong growth, we fully support growth in • Connect all renewables as part of the RE-IPP endeavour to apply Continue to engage renewables in order to lead the country in reducing Programme up to bid window 4.5 at prices of the principles of with ratings agencies its carbon emissions while delivering electricity at 77c/kWh or lower, in support of COP 21 targets King IV, and will to understand their the most competitive price possible. We will be to reduce carbon emissions focus on improving concerns and deliver investing in energy storage technology over the next • Prepare for the nuclear build programme our decision-making investment-grade five years in support of this long-term commitment approach ratings to renewables. Once South Africa’s position on COP 21 and emissions targets have been clarified, our strategy will be updated. 16 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 17 Strategy and outlook Our leadership continued Executing the strategy Municipal debt repayments Governance that drives accountability has been Initiatives translated into targets We have a strategy to reduce the arrear municipal identified as a key enabler for the successful execution debt and limit bad debt in the future. This will require of our strategy. Eskom’s Board of Directors is Our business and strategy To support us in regaining an investment-grade credit rating, the business will focus on five critical targets strong support from all relevant stakeholders. responsible for providing strategic direction, while over the next five years: Exco is responsible for implementing the strategy. Further ratings downgrades There is a clear distinction of roles and responsibilities Deterioration in ratings of either Eskom or the between the Board and Exco. 1 2 3 4 5 Sovereign will affect our ability to execute our funding plan with limited Government support, as The Board is responsible for: well as our aim to release Government guarantees. • Setting our strategic direction, aligned with DPE’s Sales growth Release The availability and cost of funding will also be Strategic Intent Statement, and accepting that Primary energy Optimising Analytics to Government affected. strategy, risk, performance and sustainability are 2.1% p.a. local spend reduction capex spend improve EBITDA guarantees Generation and grid asset uncertainty, surplus inseparable 8% exports R43bn R25bn R6bn R105bn capacity and compliance • Providing oversight through an effective compliance framework and processes; ensuring that risks are We will optimise delivery of N–1 compliance by recognised and managed through the establishment Stimulating industrial Transforming the Optimising planned Establishing world- Reducing the effectively sequencing project delivery and ensuring production in South South African coal capex spend class capabilities in burden on the of effective internal controls; internal audit is financial prudency. Given the current surplus risk-based; and by promoting integrity in financial Africa and SADC sector, through over the next digital and advanced fiscus by releasing capacity, we may have to decommission some coal- reporting greater efficiencies five years, while analytics Government and industry meeting regulatory guarantees, while fired power stations earlier than anticipated to • Ensuring Eskom is a responsible corporate citizen restructuring to and licensing maintaining a ensure an optimal generation cost. We will however (ethically, socially and environmentally) and ensure sustainability requirements moderate price path work with communities and affected mines to limit promoting an ethical culture of the sector over time the socio-economic impact of the decommissioning. The shareholder expects the Board to implement As always, our strategy will require trade-offs sound governance practices to ensure transparency, between competing priorities, such as the need to equality and fairness. Being the focal point for In achieving these targets, we will manage headcount purposes. GEs will identify initiative owners, do maintenance, manage financial challenges, reduce corporate governance, the Board is responsible to the to an optimal level without compromising operational and ensure that delivery of strategic initiatives is our environmental impact and ensure our overall shareholder and other stakeholders for performance performance, introduce new skills and capabilities cascaded into their performance compacts. This will sustainability in the longer term. and meeting their legitimate expectations, and into the organisation, and improve organisational drive a stronger link between strategic objectives to the company for survival and prosperity. The health in a way that makes Eskom an employer of and individual performance and reward. challenging operating environment requires a strong choice once again. implementation plan and clear governance structures Short-term annual cash incentives will reward Tracking our progress the achievement of annual operational excellence, to ensure success. We have proven that we can be successful when great while long-term incentives will reward long-term The Board also ensures that Eskom and its subsidiaries plans are supported by hands-on leadership, strong sustainability. A balanced approach will be put in comply with the requirements of the Companies Act, execution and dynamic monitoring, supported by place to ensure that both short- and long-term 2008, PFMA, 1999 and section 29 of the National timely risk identification and mitigation. targets are appropriately incentivised. Treasury regulations, as well as any other relevant In order to provide adequate oversight and support legislation, regulations and guidelines. Outlook execution, each of the strategic initiatives has been In pursuing our strategy, we may encounter a number mapped into delivery streams, each of which will Detail information on the activities of our Board and Exco is set out of challenges, among which: in “Our governance” on pages 94 to 97. Our values, which underpin provide a monthly report to the DTC Steering our governance, are noted on page 94 Committee as well as the relevant Executive Revenue determination uncertainty Management Committee (Exco) subcommittee. The 2.2% tariff increase for 2017/18 is much lower than expected and well below inflation. To recover Furthermore, Exco has established a Results efficient costs and earn a reasonable return during Management Office (RMO) to coordinate, monitor the next revenue cycle, a reasonable step-up in and drive the execution of strategic initiatives across price, in line with the regulatory framework, will the business. The RMO uses a multi-divisional senior be necessary. On 9 June 2017, we submitted a management committee to track performance of revenue application requesting a 19.9% increase for the identified initiatives. The committee serves as a 2018/19 to improve revenue certainty, essential to platform to highlight key performance issues across attract the necessary funding. We will engage key the business, identify interventions and follow up on stakeholders on our application. Revenue certainty corrective action. Initiatives will be prioritised so is key to regaining an investment-grade credit rating. that those with the highest impact receive optimal attention. Assumptions not materialising A shortfall in sales volumes, with expected growth not The RMO provides feedback to Exco on performance materialising, an increase in opex or capex costs, or of delivery streams and progress made against additional revenue not materialising, could all affect strategic initiatives. The implementation plans will the execution of our strategy. also form the basis upon which group executives (GEs) are compacted for performance management Our head office at Megawatt Park in Johannesburg, built in the 1970s, houses our corporate functions 18 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 19 Board of Directors at 31 March 2017 1 4 6 Dr Baldwin Ngubane (75) Ms Venete Klein (58) Ms Chwayita Mabude (47) Chairman Independent non-executive director Independent non-executive director Independent non-executive director Our business and strategy Qualifications Qualifications Qualifications Banker’s Exams (Institute of South African B Compt (Unisa) MB ChB (University of Natal) Bankers) Diploma in Tropical Medicine (University Senior Executive Programme (Wits Directorships of Witwatersrand) Business School) Add Value Property CC Master of Family Medicine and Primary Executive Development Programme Airports Company South Africa SOC Ltd Health (University of Natal) (INSEAD) Buchule Communities NGO Postgraduate Diploma in Economic Corporate Strategy (Massachusetts Bolokeng Insurance P&G 1 2 Principles (University of London) Institute of Technology) Dhanush Info Tech (Pty) Ltd Easy Wave Investment CC Directorships Directorships Gauteng Women in Transport AD and E Property Investment (Pty) Ltd Calgro M3 Holdings Innova Management Services Blue Horizon Investments 39 (Pty) Ltd Centuria (Pty) Ltd Isethembiso Suppliers CC Blue Horizon Investments 41 (Pty) Ltd D B Schenker (Pty) Ltd Kusini Drinks CC Gade Holdings (Pty) Ltd Institute of Directors in Southern Africa Mollo Holdings Ltd Gade Investments (Pty) Ltd (Chair) OR Tambo Municipality (Audit Gade Mineral Investments (Pty) Ltd Kleininc Management Consultants Committee member) Gade Oil and Gas (Pty) Ltd (Pty) Ltd PBMR SOC Ltd Global Collieries Fuel Distribution Klein Family Trust Sinokanyo Supplies CC (South Africa) PG Group Ltd SANDF Trust 7 Hanis Investments (Pty) Ltd Dr Pathmanathan Naidoo (56) Huntrex 305 (Pty) Ltd South African Reserve Bank Independent non-executive director Natal Sand Supplies (Pty) Ltd IFC P&G SES TC 3 ARC IFC P&G SES 4 ARC P&G SES 5 5 Toyota South Africa (Pty) Ltd Mr Giovanni Leonardi (56) Qualifications Zululand Quarries (Pty) Ltd B Eng Electrical Engineering (University of Independent non-executive director 2 (Swiss) Durban-Westville) Mr Anoj Singh (43) M Sc Electrical Engineering (University of Chief Financial Officer Qualifications KwaZulu-Natal) Executive director Dipl. El. Ing. ETH Management and Ph D in Technology Management Electrical Engineering (Swiss Federal and Innovation (Da Vinci Institute for Qualifications Institute) Technology Management) B Comm Accounting (University of Programme Executive Management (IMD) MBA (Samford University) Durban-Westville) Stanford Executive Programme (Stanford Post Graduate Diploma in Accounting University) Directorships (University of Durban-Westville) Pat Naidoo Consulting Engineers CC Chartered Accountant (SA) Directorships Professor of Research (University of AET – Azienda Elettrica Ticinese, Johannesburg) ARC IFC P&G SES TC 6 ARC IFC SES TC 7 Directorships Switzerland City of Johannesburg Research Chair in Classic Number Trading 120 (Pty) Ltd Eduard Steiner AG, Switzerland Green Economy and Innovation Escap SOC Ltd Immobiliare San Rocco SA, Switzerland South African Institute of Electrical Eskom Enterprises SOC Ltd Inter-Care Holding SA, Switzerland Engineers (Member of Council) Eskom Finance Company SOC Ltd Lebag France SAS, France IEEE South Africa Section (Chair) Even Grand Trading 173 CC Lebag Leitungs-und Elektrobau AG, ARC Audit and Risk Committee IFC Investment and Finance Committee Spring Green Trading 199 CC Switzerland Leonardi Energy & Management SA, 3 Switzerland P&G People and Governance Committee SES Social, Ethics and Sustainability Committee Mr Zethembe Khoza (58) Lineltel SA, Switzerland  Independent non-executive director Patria Genossenschaft, Switzerland TC Board Tender Committee Denotes chairmanship of a committee Pini Swiss Engineers, Switzerland Qualifications PKB Privatbank SA, Switzerland National Technical Diploma SACAC-Holding AG, Switzerland Enterprise Leadership for Executives Tenconi SA, Switzerland (University of North West) Villa Santa Maria SA, Switzerland Board of Directors: Gender and racial equity Directorships Zet Kay Funeral Directors Zet Kay Investments (Pty) Ltd Black White Ages are shown at 31 March 2017. Ms Venete Klein resigned as a director on 12 May 2017. Dr Baldwin Ngubane resigned on 12 June 2017. 20 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 21 Executive Management Committee at 31 March 2017 1 5 9 Mr Matshela Koko (48) Mr Willy Majola (51) Mr Mongezi Ntsokolo (56) Interim Group Chief Executive Acting Group Executive: Generation Group Executive: Distribution Our business and strategy Years in Eskom: 20 Years in Eskom: 23 Years in Eskom: 26 Appointed to Exco in December 2014 Appointed to Exco in January 2017 Appointed to Exco in October 2003 Qualifications Qualifications Qualifications B Sc Chemical Engineering (University of B Sc Engineering (University of B Sc Electrical Engineering (University of Cape Town) Witwatersrand) Witwatersrand) BBA Hons (University of Stellenbosch) Directorships Directorships MBA (University of Stellenbosch) 1 2 Eskom Rotek Industries SOC Ltd Motraco Private Company Executive Development Programme (City University of New York) 2 6 Mr Anoj Singh (43) Mr Sean Maritz (50) Directorships Chief Financial Officer Group Executive: Information ACWA Energy Technology and Chief Information Eskom Enterprises SOC Ltd Years in Eskom: 2 Officer Eskom Rotek Industries SOC Ltd Appointed to Exco in August 2015 Years in Eskom: 28 10 Qualifications Appointed to Exco in June 2016 Ms Elsie Pule (49) B Comm Accounting (University of Group Executive: Human Resources Durban-Westville) Qualifications Post Graduate Diploma in Accounting B Com (Rand Afrikaans University) Years in Eskom: 19 (University of Durban-Westville) Diploma in Datametrix (Unisa) Appointed to Exco in November 2014 Chartered Accountant (SA) Certified open group architect 3 4 5 Qualifications Certified SAP specialist Directorships BA Social Work (University of the North) Classic Number Trading 120 (Pty) Ltd Directorships BA Hons Psychology (University of Escap SOC Ltd None Pretoria) Eskom Enterprises SOC Ltd M Sc Business Engineering (Warwick Eskom Finance Company SOC Ltd 7 University) Even Grand Trading 173 CC Mr Abram Masango (48) Spring Green Trading 199 CC Group Executive: Office of the Chief Directorships Executive Eskom Finance Company SOC Ltd 3 Mr Prish Govender (43) Years in Eskom: 20 11 Acting Group Executive: Group Capital Appointed to Exco in October 2015 Ms Suzanne Daniels (47) Group Company Secretary Years in Eskom: 18 Qualifications 6 7 8 Appointed to Exco in March 2017 National Diploma in Mechanical Years in Eskom: 11 Engineering Appointed as Group Company Secretary Qualifications National Higher Diploma Mechanical in October 2015 B Sc Mechanical Engineering (University of Engineering (Vaal Triangle Technikon) Witwatersrand) M Sc (Cum laude) (Da Vinci Institute for Qualifications Technology Management) BA (University of Cape Town) Directorships LLB (University of Cape Town) None Directorships Postgraduate Diploma in Law (University Eskom Development Foundation NPC of Cape Town) 4 Mr Thava Govender (49) 8 Directorships Group Executive: Transmission and Ms Ayanda Noah (50) None Sustainability Group Executive: Customer Services Years in Eskom: 26 Years in Eskom: 25 9 10 11 Appointed to Exco in September 2010 Appointed to Exco in June 2007 Qualifications Qualifications B Sc Chemistry and Biochemistry B Sc Electrical Engineering (University of (University of Durban-Westville) Cape Town) B Sc Hons Energy Studies – Nuclear & MBA (International Management Centres) Fossil (Rand Afrikaans University) Executive Development Programme Management Development Programme (University of Witwatersrand) (Unisa) Advanced Management Program (Harvard Executive Management Committee: Gender and racial equity Advanced Management Program (Harvard Business School) Business School) Directorships Directorships Council for Scientific and Industrial Electric Power Research Institute (EPRI) Research Black White Eskom Enterprises SOC Ltd Eskom Rotek Industries SOC Ltd Eskom Rotek Industries SOC Ltd South African National Energy Association (SANEA) Ages are shown at 31 March 2017. 22 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 23 Stakeholder engagement and material matters The Board has delegated the management of Our customers comprise large industrial customers, We are still investigating the formation of a stakeholder advisory council, to provide an external perspective on stakeholder relationships to Exco, with oversight by metros and municipalities, commercial, agricultural material matters to inform corporate decision-making. We will continue assessing stakeholder relationships, to the Social, Ethics and Sustainability Committee (SESC). and residential customers, whether supplied by better understand stakeholders’ insights and expectations. Our business and strategy To enable the successful execution of our strategy, Eskom or municipalities, as well as a number of cross- border customers and utilities. Business and industry Stakeholder engagements and topics covered and thereby our ability to create value, we require provide representation on behalf of various customer Engagements with stakeholders occur on a regular basis through various platforms, in many instances monthly effective stakeholder management to ensure the right groups. We could not deliver on our mandate without or at least quarterly. Engagements are carefully planned by the Stakeholder Relations Department within the level of advocacy and clear communication with major our suppliers and contractors or our employees, Corporate Affairs Division, in terms of scope and engagement approach, as well as the intended outcome. Some of stakeholders. represented by a number of trade unions. the engagements are noted below: To that end, we engage with stakeholders to determine their legitimate needs, interests and concerns, as well As the execution of our strategy relies heavily on Stakeholder group Type of engagement Topics covered as to ensure alignment and a collaborative approach on funding, we are dependent on lenders and investors, Government One-on-one meetings Strategy, governance and leadership key strategic initiatives. We commit to the principles supported by credit ratings agencies and other departments and Presentations to Parliamentary Government support package conditions of accountability, inclusivity, materiality, responsiveness financial agencies, such as the South African Reserve Parliament portfolio committees Electricity price path, RCA submisions and revenue application and completeness. Bank (SARB) and the International Monetary Fund Committee meetings Financial and operational performance (IMF). We are further held to account by civil Annual general meeting Management of municipal and arrear debt Our strategy has been adapted in recent years in society, the communities in which we operate, and Site visits Status of coal contracts response to concerns raised by stakeholders – an the media at large. Progress on the new build programme example would be the realisation that the country Environmental sustainability cannot afford the transition to cost-reflective tariffs in Quality of relationships Energy supply, surplus capacity, energy mix and allocations, the short term. As a result, we now aim for moderate We strive for value-adding relationships with our including renewables and nuclear energy, and carbon budgets electricity price increases over time while right-sizing stakeholders, to create an environment that enables Impact of the RE-IPP Programme and possible stranded assets Eskom’s cost base, to support economic growth. collaborative conversations on key strategic topics Supplier development and localisation, job creation of mutual concern. Over the years, Government in Legal and regulatory compliance Our interaction with stakeholders particular has demonstrated unwavering support and Disaster management protocols Stakeholder groups commitment to enable us to deliver on our mandate Regulators Submissions in terms of legislation, Financial and operational performance Our stakeholders cover a broad spectrum. They to promote GDP growth and ensure energy security regulatory methodology and rules Electricity price path, RCA submissions and revenue application include groups that affect, and/or are affected by, our for the country. Public hearings Eskom tariff structures and pricing policies activities, whether directly or indirectly, and whether Energy supply, surplus capacity, energy mix and allocations, positively or negatively. The quality of our relationships with stakeholders including renewables and nuclear energy is constantly monitored and enhanced. One way Energy market regulation As a state-owned company, we are accountable to our of assessing our relationships is to consider our Legal and regulatory compliance shareholder ministry, DPE, and also work closely with RepTrakTM score, which signifies the strength of our our policy ministry, DoE. We interact with a number brand and reputation. Currently, our score falls into Key customers Customer forums and liaison Power system status and emergency protocols meetings Eskom tariff structures and pricing policies of other goverment departments, such as National the weak/vulnerable range. Our aim is to improve that Breakfast sessions and meetings Impact of electricity price uncertainty on customer operations Treasury, Department of Environmental Affairs to at least moderate over the medium term. with senior management and planning (DEA), Department of Water and Sanitation (DWS), Site visits A recent stakeholder relationship assessment Progress on the new build programme Cooperative Government and Traditional Affairs Industry associations and forums Security of supply, plant maintenance, ageing fleet and future (COGTA), and many others. We interact regularly conducted with North West Province and national Quarterly briefings coal supply with Parliament and its various committees providing stakeholders indicated a reasonably strong relationship Nuclear build programme – affordability and risk of stranded assets oversight of our operations. NERSA and the NNR with our stakeholders, with an average score of 65%. regulate our business, as previously explained. There is, however, room for improvement. Lenders, investors Roadshows Strategy, governance and leadership and credit ratings One-on-one meetings Financial performance and liquidity management agencies Results presentations and Funding plan, utilisation of Government guarantees and continued webcasts Government support Site visits Credit ratings and impact on funding Panel discussions, investor Electricity price path and impact of High Court decision in the conferences and networking Borbet case opportunities Power system status and operational performance Dealing with surplus capacity, including possible decommissioning of power stations Progress on the new build programme Energy strategy, renewables and nuclear energy Employees and trade Provincial employee engagements Strategy, governance and leadership unions, suppliers and Collective bargaining practices Financial and operational performance contractors Development programmes Dealing with surplus capacity Wellness campaigns, HIV and Aids Employee benefits awareness Health and safety Open dialogues, conferences and Skills development programmes forums Supplier development and localisation, job creation Regular staff communiqués Progress on the new build programme and workforce Expos demobilisation We use our GigRig to educate the public about the dangers of unsafe electricity use 24 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 25 Stakeholder engagement and material matters continued Stakeholder group Type of engagement Topics covered Material stakeholder matters We then evaluate the impact of the matters Material matters are those that are both of importance identified on the execution of our strategy, future Business and Industry associations and task Strategy, governance and leadership to stakeholders and could have a substantial impact performance and value creation by considering the Our business and strategy industry, civil teams Financial and operational performance society and non- on our business, with the potential to significantly effect of the matter, taking account of both the Community, stakeholder and NGO Impact of electricity price path governmental forums affect the achievement of our strategic objectives and likelihood of the matter occurring, as well as the Eskom tariff structures and pricing policies organisations Roadshows consequently, our ability to create value. magnitude of its impact. (NGOs) Management of municipal and arrear debt Quarterly briefings Energy losses and energy protection initiatives Materiality determination process Matters are then prioritised based on their relative Progress on the new build programme The first step in the materiality determination process importance. Although we consider all matters raised Energy supply, surplus capacity, energy mix and allocations, is to identify relevant matters based on their ability by stakeholders, only those deemed to be material including renewables and nuclear energy to affect our value creation process. We perform the matters are covered in detail in our report. Other Environmental performance process annually. Our starting point is those matters concerns are addressed through various other Research and innovation programmes reported in the prior year, which we then update platforms. Supplier development and localisation based on a review of changes during the current year. Legal and regulatory compliance The process is overseen by Exco and ratified by the Industry experts, Industry associations and task Strategy, governance and leadership As part of that review, we consider topics discussed Board. analysts, academics teams Financial and operational performance at Board level, the outcome of the risk management and media Current year material matters Forums and committees Power system economics process, as well as issues raised through various The majority of the material matters described in our Roadshows Power system status stakeholder platforms – lenders and investors, key 2016 integrated report remain relevant, even though Quarterly briefings Eskom tariff structures and pricing policies customers, customer surveys, matters raised in the level of importance to stakeholders or the impact Management of municipal and arrear debt Parliament and by the media, and more generally via on our value creation may have changed. Some new Progress on the new build programme the Stakeholder Relations Department. Energy supply, surplus capacity, energy mix and allocations, issues have been raised, or increased in importance. including renewables and nuclear energy Research and innovation programmes The following have been identified as material matters in this report: Skills development programmes Current impact Timeframe of Material matter on value creation impact No engagements were conducted specifically as part Enabling execution of our strategy Regulatory environment and uncertainty of the electricity price path, including Negative Short, medium and of the process of preparing the integrated report. There are critical areas on which we need to align the treatment of RCAs long term with key stakeholders, in particular: • Support energy-intensive users and the The impact of stagnant or declining sales on Eskom, combined with the impact Negative Short to medium of increased electricity prices on the economy term Engaging with key customers Government in driving new projects and increasing The Top Customer Department within the consumption of existing projects, and developing Financial performance, cost management and liquidity Positive Short to medium Customer Service Division manages Eskom’s full sector-specific strategies for high-growth sectors term service provision to 143 key industrial customers aligned to the NDP Funding plan and the impact of credit ratings downgrades, together with Both positive and Short, medium and (KICs), to meet their expected service requirements. • Partner with municipalities to drive growth from Government support negative long term KICs are direct customers within the industrial and low-debt, high-growth industrial areas, improve Arrear customer debt – mainly municipalities and residential customers – and Negative Short to medium mining sectors who individually consume more than collections and roll out smart meters to residential the impact of disconnections on customers term 100GWh of electricity per year. customers Surplus capacity, which is due to improved plant performance, new capacity Both positive and Medium to long term • Collaborate with government entities for support being brought online by the new build programme and connecting IPPs, coupled negative KICs comprise approximately 38% of local sales and across a number of areas, including financial with stagnant sales, which may require the decommissioning of older power 33% of local revenue. In view of the decline in local sustainability, environmental compliance, decisions stations sales and the availability of surplus capacity, KICs on energy mix and sustainable asset creation for Environmental performance, including emissions, water use and environmental Negative Short to medium are engaged to identify areas to increase sales or future provision of electricity, to support economic contraventions, which may affect our capacity and compromise our licence to term to accelerate current expansion projects already in growth operate the pipeline. • Cooperate with research institutions to develop Energy mix and carbon footprint of our fleet, including renewables and nuclear May be either Medium to long term The Top Customer Department strives to hear the sustainable and renewable energy solutions for energy, coupled with concerns around water scarcity and climate change positive or negative voice of our key industrial customers and ensure that customers in South Africa and Africa Skills and transformation of our workforce Positive Medium to long term we clearly understand their needs and expectations. • Involve employees and affected communities if We endeavour to interact with these customers required, to minimise the anticipated negative Governance and procurement practices Perceived as Short, medium and on a proactive basis, to allow for their meaningful environmental and socio-economic impacts of the negative long term influence on important issues which could impact possible decommissioning of power stations them in future but can be dealt with proactively. The • We require the understanding and support of sharing of information is continuous and is done in a stakeholders to meet business objectives, such Our strategic risks, which are largely aligned to the material matters, are set out on page 29 with their associated risk rating and treatment strategy transparent and open manner. as the drive towards cost savings and increased productivity, particularly in manpower, primary energy procurement, capital project execution and customer service • Future tariff escalations granted by NERSA need to take into account both the needs of South African citizens and Eskom’s financial sustainability, with any trade-offs made explicitly and transparently 26 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 27 Risks and opportunities, assurance and controls Whereas risk in general speaks to the effect of Enterprise risk management process Disaster risks uncertainty on achieving objectives, strategic risks Our Board, through the Audit and Risk Committee Disaster risks are those inherent to our operations • Cyber-attack or catastrophic IT failure are those which are most significant to our ability to (ARC), manages our risk and resilience in order to that would have a significant consequence should they • National drought Our business and strategy achieve our strategic objectives, thereby impacting provide greater security for our employees, our materialise. Generally, those are not listed as Priority 1 value creation and sustainability. Effective risk customers and other stakeholders. They assess the risks on the risk register because of their perceived Although South Africa experienced a severe drought mitigation strategies have been identified as a key risk landscape to determine the strategic and business low likelihood, coupled with the perceived adequacy over the past year, as a strategic water user, we were enabler to the successful execution of our strategy, risk profiles of the organisation. This occurs through of the controls. They are generally managed through less severely affected. particularly mitigating the risk of lower than budgeted both a top-down process for strategic risks, and a our resilience initiatives. Our strategic risks tariffs. bottom-up process for business or operational risks. The disaster risks have remained relatively unchanged The following table details the strategic risks and over the past year. They are: provides the associated risk rating on the Eskom Our strategy development process integrates risk management, as shown below: Risk Matrix, the impact on value creation and the • National blackout • Severe power system constraint associated timeframe, as well as the treatment • Nuclear incident strategy. Impact on value Timeframe Strategic risk Strategic risk/opportunity Rating creation of impact Treatment strategy appetite and 1. Impact of energy policy and IRP allocations with unclear 6D Could be Short, Regulatory strategy risk of strategy industry structure, impacting or altering our energy mix positive or medium and Stakeholder engagement options Shaping our future and flexibility to balance the system negative long term Scanning our through strategy environment 2. Energy policy and price path misalignment, which could 6D Negative Short, Regulatory strategy development result in delays in migrating to prices reflecting prudent and medium and Stakeholder engagement efficient costs, thereby impacting financial sustainability, long term energy mix and emissions 3. Declining long-term profitability, requiring higher tariffs, 6E Negative Medium to Financial strategy Risk of cost cutting or increased borrowings to fund the shortfall long term Optimisation of opex and Emerging Integrated and strategy capex risk and proactive strategy misalignment 4. Impact of the following on the ability to borrow: credit 5D Negative Medium to Funding strategy strategic risk development and and critical ratings downgrades; loss or exhaustion of Government long term profile execution assumptions guarantees; country-level fiscal crisis; inadequate electricity prices; regulatory uncertainty 5. Escalating municipal debt and revenue shortfalls, leading to 5E Negative Short to Debt management strategy financial and liquidity constraints medium term Installation of split, smart and prepaid meters 6. With decreasing local sales volumes coupled with surplus 5D Negative Medium to Sales growth strategy capacity, the inability to sell surplus capacity into the region long term Asset management strategy may lead to stranded assets Risk of 7. Changing load profile and impact of adding IPP capacity, 5D Mainly Short, Generation Sustainability execution leading to base-load plant being operated as mid-merit, with negative medium and Strategy the knock-on effect on plant health long term Asset management strategy Monitoring and Planning strategy adjusting our direction execution 8. Inability to build transmission lines fast enough to connect 4D Negative Medium to Integrated project IPPs and the region long term management 9. Inability to meet climate change mitigation targets (e.g. 6E Negative Medium to Climate change strategy carbon budgets) and failure to implement climate change long term adaptation measures 10. Lack of adequate, available and affordable skills 4D Negative Medium to Human resources strategy Strategic risks Priority IV risks at the lowest level. The levels are long term Succession planning Strategic risks are identified through risk and resilience determined through the use of a combination of Skills development and training workshops with Exco and Board, supported by a consequence criteria – that range from financial to bottom-up review by divisions and the involvement reputational, safety and environmental outcomes or These risks relate to our ability to sustain our operations and financial performance over the medium to long term. of key subject matter experts in the business. These impacts – and likelihood criteria. interventions are supported by regular environmental scanning that monitors changes in our broader The accountability and responsibility to treat operating environment. business risks rests with line management, although Priority 1 risks are reported to Exco and ARC for Strategic risks are often very integrated in nature, oversight. As a Level 2 assurance provider, the having holistic implications and consequences. Enterprise Risk Management function develops guidance around Eskom’s risk management policy, Business risks and ensures that such guidance is adhered to. The identification of business risks is driven by line management, focusing on the key risks that The business risks faced by our subsidiary in Uganda may affect the achievement of divisional business are not markedly different from those facing our plans. Business risks fall into four different priority South African operations. levels, with Priority 1 risks at the highest level, and 28 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 29 Risks and opportunities, assurance and controls continued The diagram below sets out the risk ratings of the Identifying and prioritising opportunities Assurance and controls Risk management and internal controls strategic risks identified on the Eskom Risk Matrix. Globally, the electricity landscape is changing rapidly. Systems, policies and procedures The Board, through ARC, ensures that an effective Eskom is not immune to this change and we are facing Systems underpin every aspect of our operations, from risk management process is in place and that internal Our business and strategy Strategic risks at 31 March 2017 controls are effective and adequately assessed for threats on multiple fronts: within the South African the efficiency of our power stations to the experience electricity market, and within the broader global of our customers to the safety of our workforce. auditing and regulatory purposes. The combined 6 1 2 3 9 energy context. With a wave of change in customer, Standardised processes, policies and procedures have assurance model provides ARC with an overview of supplier and competitor behaviour, we are facing a been developed for all aspects of the business; these significant risks, as well as the effectiveness of critical constrained electricity sales path. are updated regularly to ensure good governance controls to treat those risks. 4 6 5 5 and efficiency improvements. We track a number of 7 Potential sources of revenue growth range from those The Assurance and Forensic Department (A&F) KPIs to measure business performance, most notably that are close to our current capabilities to those that performs quarterly assessments on the design, those determined by the shareholder in our annual are entirely new. By exploiting both regulated and implementation and effectiveness of the risk shareholder compact. Consequences 4 8 10 management process, as well as internal financial, unregulated opportunities, we have an opportunity to deliver significant revenue impact. We have achieved ISO 9001:2008 certification. IT and operational controls. The outcome of the Furthermore, we have implemented ISO 14001:2004, assessments, based on the results of audit work 3 We will do this by unlocking opportunities, focusing OHSAS 18001:2007, ISO 31000:2009 and AA 1000 planned and completed by both internal and external on local demand stimulation, cross-border sales and in specific divisions or business units, to regulate assurance providers, concluded the following: unregulated opportunities. A clear distinction exists environmental management, occupational health and 2 between the business of today and the Eskom of safety, risk management and stakeholder engagement tomorrow, necessitating a focused and structured respectively. approach, which will ensure the right level of focus and drive for each identified opportunity. 1 We apply a structured stage-gate process to identify, A B C D E develop and prioritise opportunities through to <1% >1% >20% >50% 99% commercial application. Opportunities are sourced Likelihood from within Eskom and externally. These ideas are then assessed and filtered through an opportunity Risk management Internal Operational process financial controls IT governance IT controls controls funnel. A risk management Nothing significant Group IT has Nothing significant Internal controls Only ideas with the highest potential and chance of success continue to development, system for has come to the maintained has come to the are considered to ensure that scarce resources are optimally allocated identifying, attention of A&F substantial attention of A&F partially effective, managing, and causing it to believe alignment to the causing it to believe as there are reporting on risk that the internal IT governance that the IT controls underlying is in place and financial controls principles in King III do not form a weaknesses in > 250 R12bn R2.7bn adequate do not form a reasonable basis reasonable basis for the preparation certain areas of operations opportunities turnover turnover R1bn R1.7bn There has been notable progress for the preparation of reliable financial Certain control identified with regard to of reliable financial statements deficiencies statements the operational were identified, effectiveness of risk with a moderate management likelihood of Landscape of 17 initial value 4 value 3 business Commercial affecting the opportunities propositions propositions cases implementation achievement of control objectives Noteworthy emerging opportunities include: • Investigating opportunities associated with storage options in both diversifying the business and retaining Interventions designed to address and improve the Group IT performs self-assessments to review customers in the medium term. Storage technologies have matured enough to enable large-scale implementation control environment are continuing and benefits are compliance with standards in line with best practice within reasonable risk parameters. We are identifying areas where battery storage can be deployed, with a view expected to be realised in the medium to long term. and legislation. Areas of non-compliance identified to applying these technologies at scale across the grid in the next three years Improvements have been seen in most areas where are remediated and monitored accordingly. Group • Leveraging clean fossil fuel and transmission-based opportunities in the region through our integrated Africa these have been implemented. IT is confident that adequate compensating controls strategy are in place where needed. IT governance • Exploring water usage and potential partnerships as a revenue-generating business The Board has delegated its IT governance oversight Group IT remains ISO 9001:2008 certified, and and responsibility to ARC and Exco respectively. maintains substantial alignment to the IT governance principles in King III; any outstanding principles will A&F includes reports on IT audits in its quarterly continue to be addressed and covered through a submissions to Exco and ARC which provide King IV gap analysis which is currently under way. assurance on Group IT’s compliance with relevant legal and regulatory requirements. Governance, risk and compliance reports which include IT performance are also submitted to ARC on a quarterly basis. 30 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 31 Risks and opportunities, assurance and controls continued Combined assurance The combined assurance approach to our reports is set out below: Combined assurance assists management in identifying duplication or potential shortfalls in assurance work, and developing improvement plans where necessary. The model further guides assurance providers to reach Framework(s) Internal External Our business and strategy consensus on the key risks faced by the company, their significance and effectiveness of treatment strategies, Report applied assurance assurance Outcome thereby reducing the likelihood that significant risks remain unidentified. Integrated report International Reviewed by line management, Sustainability KPIs Reasonable assurance The combined assurance model assists Board and ARC in forming their view of the adequacy of risk management Framework group executives and CFO contained in the provided by A&F on GRI G4 guidelines Reviewed and recommended shareholder compact figures and associated and internal controls in the organisation. The model recognises three lines of defence: were externally assured text for approval by Exco, ARC and SESC by SNG Reasonable assurance Approved by Board provided by SNG on all A&F verified the entire report but four KPIs LEVEL 1 Operations management and specialised review functions Annual financial IFRS Reviewed by line management Audited by SNG, our Qualified audit opinion Assurance over the adequacy of operational risk Line management is statements Companies Act and CFO independent external relating to compliance management, effective adherence to control processes responsible for managing Reviewed and recommended auditors with PFMA and PFMA and delivery against business operational sustainability risk and performance for approval by Exco and ARC completeness of objectives Approved by Board irregular expenditure Oversight by group The consolidated annual executives financial statements are fairly presented, except for the qualification LEVEL 2 Specialised control functions Risk, resilience and compliance management Development and Assurance over Management is supported maintenance of internal the implementation in executing its duties; ARC has concluded, based on the information and explanations given by management and A&F, as well as through Combined assurance control frameworks of risk, resilience provides a layer of control discussions with the external auditors, that the system and processes of risk management and compliance are and policies, review of and compliance over risk management adequate, and that the internal controls are adequate to ensure that the financial records can be relied on for the suitability and monitoring management policies of application and processes Oversight by Exco, ARC preparation of reliable financial statements. and SESC LEVEL 3 Internal audit External audit Assurance over Independent Independent of the adequacy and reasonable assurance management effectiveness of the that the financial Final oversight by ARC network of risk statements are management, control free from material and governance misstatement and processes, including are prepared, in all key financial controls material respects, in as represented by accordance with IFRS. management Provides business insights on internal financial controls and financial reporting ARC is ultimately accountable for providing oversight of the combined assurance activities in terms of the combined assurance framework. Operational responsibility for combined assurance has been delegated to A&F, which performs our internal audit function, facilitates and coordinates the execution of combined assurance activities and reports back to the committee. ARC receives reports on the status of governance, risk management, compliance and the adequacy of preventative and corrective controls from the various levels of assurance. Refer to the report of the Audit and Risk Committee in the annual financial statements for the full assessment of the internal control environment Our high-voltage transmission network links power stations and IPPs to our distribution network, which relays electricity to customers 32 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 33 Executive overview Operating performance Our strategy All four units at Ingula, with total installed capacity of 35 Executive overview Eskom is ideally positioned to support the economic 1 332MW, are now in commercial operation. Medupi 37 Revenue and customer sustainability recovery of South Africa and enable industrial Unit 5 was synchronised on 8 September 2016. The 42 Operational sustainability growth across Southern Africa. We have refined our unit, with installed capacity of 794MW, achieved 53 Sustainable asset creation strategy launched last year – which is aligned with commercial operation on 3 April 2017, after 59 Environmental and climate change Government’s NDP objectives to drive economic completing performance, reliability and compliance sustainability recovery and GDP targets – to ensure that Eskom tests. After the synchronisation of Kusile Unit 1 on drives the reindustrialisation of the economy. 26 December 2016, the unit achieved full load during 63 Safety and security March 2017, while testing continues. The project is 66 Building sustainable skills We will build on the momentum of our performance working towards commercial operation of the unit. 69 Transformation and social sustainability and efficiency improvements over recent years and Medupi Unit 4 was also synchronised on 31 May 2017. become a more customer-centric organisation that partners with key sectors to increase industrial A total of 585.4km transmission lines were constructed activity, electricity consumption and job creation. during the year. We also commissioned 2 300MVA We will respond to the changes in our environment, transmission transformer capacity, both exceeding the such as technology and policy shifts, to ensure our year-end target. The 765kV network to the Western Operating performance longer term sustainability. Cape was completed, signifying a significant milestone towards improving grid stability. Our strategy is built around seven strategic pillars, namely customer centricity; reliability and increase The Board provisionally approved discontinuing in capacity; cost efficiencies to ensure a sustainable the Kiwano concentrated solar power (CSP) electricity price path; decarbonisation of the project. However, the lenders require an equally economy; innovation and transformation; new transformational renewable project that addresses capabilities and advanced analytics; and funding. the CSP project’s objectives and the existing funding These will support us in achieving sustainability in conditions. We are in the process of exploring our current business, and lay the foundation for the alternative options that will satisfy the lenders’ Eskom of the future, while ensuring that our funding requirements. strategy supports both objectives with financial Plant availability (EAF) improved significantly to prudence. Exco will be fully accountable for efficient 77.30% for the year (March 2016: 71.07%). The implementation of the initiatives. improvement in EAF, coupled with a reduction in Our strategy targets a number of key improvements unplanned maintenance (UCLF), is indicative of over the medium term: the turnaround of Generation performance. As a • Encouraging electricity demand to support economic result, OCGT usage was negligible at 29GWh at a growth, by achieving average annual growth of 2.1% cost of R340 million (March 2016: R8.7 billion spent in local demand and 8% in export sales producing 3 936GWh). • Reducing primary energy spend by R43 billion Eskom purchased 11 529GWh from IPPs at a cost of through greater efficiencies and influencing coal R21.7 billion during the year (March 2016: 9 033GWh sector restructuring at R15.4 billion), at an average cost of 188c/kWh • Optimising planned capex spend by R25 billion and (March 2016: 171c/kWh). At 31 March 2017, total IPP incorporating a private sector partnership strategy capacity of 5 027MW was available to the system • Driving efficiencies through advanced analytics, to (March 2016: 3 392MW). deliver a R6 billion EBITDA improvement • Releasing R105 billion in Government guarantees, By improving the performance of the existing while maintaining a moderate electricity price path generation fleet, delivering on the new build over the medium to long term programme and connecting IPPs to the grid, we are now in a position where we have surplus capacity We also plan to optimise our workforce through available to meet future demand and stimulate a fit-for-purpose operating model, retaining and economic growth. redeploying skilled and talented people, and creating a high performance leadership culture. Notwithstanding the negative impact of a few relatively large incidents involving plant failures in Refer to “Strategy and outlook” on pages 15 to 19 for more the first half of the year, the Transmission system information minutes <1 performance target was attained, with no major incidents during the year. Distribution network Operating performance performance in terms of average interruption We set out with the aim of stabilising and re- frequency and duration is better than target, with energising our business for longer term sustainability interruption frequency showing an improvement on and growth, by setting aggressive goals for progress. last year. We intended continuing with a rigorous programme of planned maintenance without implementing load shedding and minimising the use of OCGTs. We are already reaping the rewards. 34 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 35 Operating performance Executive overview continued Revenue and customer sustainability Particulate emissions performance at 0.30kg/MWhSO To ensure optimal generation costs we will continue met target and showed an improvement on last year to apply the least-cost merit order dispatch of (March 2016: 0.36kg/MWhSO). Water usage related power stations. The combination of slower demand to power station operations for the year was slightly growth, improved plant performance and an better at 1.42ℓ/kWhSO (March 2016: 1.44ℓ/kWhSO), increase in IPP and our own capacity, has resulted in although not meeting target. surplus generation capacity in South Africa. In order to ensure an optimal generation cost, we may need Group earnings before interest, tax, depreciation, to consider decommissioning some coal-fired power amortisation and fair value adjustments on financial stations, but in a way that optimises coal, people instruments and embedded derivatives (EBITDA) and capital costs across our fleet. In the meantime, increased to R37.5 billion (March 2016: R32.8 billion, three stations will be placed in lean preservation, to restated), driven by the 9.4% electricity price increase, minimise surplus capacity. improved export sales volumes and primary energy costs being contained. We will continue to engage with Government, collaborating closely with DoE and NERSA in The Chief Financial Officer’s report on pages 74 and 75 further particular, to manage the risks of the IPP programme Operating performance discusses our financial performance and mitigate any unintended negative operational and financial impacts on Eskom. In the medium term, we We are still experiencing a number of challenges, such will connect IPPs for all procured rounds at prices of as declining or stagnant sales volumes in key segments. 77c/kWh or lower. Demand from key industrial customers remains lower than in previous years, largely due to a reduction in Our capital expansion programme, the largest in output by key customers or the closure of customer Africa, includes completion of Medupi and Kusile on plants due to the difficult economic environment. schedule, in such a way that we continue to create jobs, build skills and alleviate poverty. We aim to Total municipal arrear debt continued to escalate strengthen the transmission network towards to R9.4 billion at year end (March 2016: R6 billion) attaining N–1 compliance, and to expand the and remains unacceptably high, despite numerous network into the SADC region to unlock regional interventions. During January and February 2017, constraints to growth. supply was interrupted to four municipalities in the North West Province, two in the Northern Cape and We will continue to implement technologies to two in Mpumalanga. prevent tampering using split metering units, facilitate the conversion of customers to prepaid, Safety performance has deteriorated slightly year- and roll out smart metering in Sandton, Midrand and HIGHLIGHTS CHALLENGES on-year, although we experienced fewer fatalities. Soweto, with a target of 366 500 over the next five Meeting the procurement and employment equity years. We further aim to ensure universal access • Eskom KeyCare and CustomerCare scores • Of the 60 active municipal payment have improved significantly over the year agreements in place, only 31 are being fully targets set by the shareholder remains a challenge, through one million electrification connections over • Installation of smart meters in Sandton honoured although there has been some improvement over the medium term. Areas where battery storage can exceeded target, with conversion to prepaid • Soweto small power user arrear debt the past year. Through our social development be deployed are being investigated, with a view to meters having commenced continues to escalate, with payment levels programmes, we continue to impact the lives of applying these technologies at scale across the grid declining hundreds of thousands of South Africans. We also in the next three years. • Vandalism of equipment in an attempt to connected 207 189 households to our network in bypass meters installed in Soweto continues terms of the DoE funded electrification programme. Realising our aspirations will require a single- minded focus on delivery. We need further Outlook alignment between Eskom’s strategic direction PROGRESS LOWLIGHTS Eskom will continue to stimulate economic growth and the expectations of the shareholder and key in support of the NDP while striving to regain stakeholders. Exco will ensure that the identified • Transmission energy losses performance has • Municipal arrear debt has escalated 57% improved, mainly due to the addition of IPPs year-on-year to R9.4 billion, with 62% of an investment-grade credit rating. However, we strategic initiatives are embedded in the business. in the coastal regions municipal debt being in arrears face a number of challenges in delivering on our We are committed to deliver on our strategy and to • Conversion of customers to prepaid meters • Distribution energy losses have shown a strategy, such as doubt around tariff determination renew Eskom to enable economic growth in South in Soweto achieved target, despite delays significant deterioration and RCAs, the ability to drive increases in sales Africa and the region. earlier in the year volumes, municipal debt payments and arrear debt, further credit ratings downgrades, uncertainty around generation and grid assets, combined with the challenges, and also opportunities, of managing surplus capacity. 36 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 37 Revenue and customer sustainability continued We strive to become a customer-centric While revenue recovery from large power users Key debt management indicators at 31 March 2017 organisation that delivers world-class customer (LPUs) has improved, the management of municipal Target Target Target Actual Actual Actual Target service across all segments. We focus on customer and residential arrear debt, especially Soweto, Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? service performance using a number of metrics, as remains a significant challenge. The rollout of split well as revenue and debtor management, primarily and/or smart meters and subsequent conversion to Arrear debt as % of revenue, % 1.12 1.29 1.22 2.43 1.14 2.17 through measuring arrear debt as a percentage of prepaid meters continues, in an effort to improve Debtors days – municipalities, average 71.10 67.70 60.99 53.25 42.93 47.58 revenue and the average number of debtors days residential revenue recovery. debtors daysSC across various customer categories. Debtors days – large power top Management of energy protection and revenue losses customers excluding disputes, average 15.30 15.40 15.32 15.34 15.51 16.84 Looking back on 2016 remains ongoing. debtors daysSC Other large power user debtors days We continue to focus on timely customer query 16.00 16.30 16.55 16.78 16.24 17.02 resolution through primary touch points such as Customer service performance (<100GWh p.a.), average debtors days SC We continue to employ a range of statistical Debtors days – small power users Top Customer account executives, contact centres, 48.60 48.20 47.70 48.75 48.24 49.06 excluding Soweto, average debtors daysSC customer service hubs, the MyEskom app and email perception and interaction-based customer surveys, service. The results are reflected in our improved conducted by independent research organisations, to 1. Debtors days are based on amounts processed on our billing system, and shown before accounting adjustments relating to IAS 18. customer perception scores. measure our customers’ satisfaction with our service. Operating performance Total municipal arrear debt (including interest) and 20 partially honoured, with nine payment at 31 March 2017 has increased to R9.4 billion arrangements not being honoured. However, only Target Target Target Actual Actual Actual Target Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? (March 2016: R6 billion). The top 20 defaulting seven of the top 20 defaulting municipalities are municipalities contributed R7.4 billion to municipal honouring their payment agreements. Eskom KeyCare, index 102.0 102.0 104.0 107.0 104.3 108.7 arrear debt (March 2016: R4.8 billion), or approximately Top Customer KeyCare, index 104.0 104.0 104.0 108.1 107.2 110.5 79% of the total arrears. Furthermore, 80% of the The top three Free State municipalities account for Enhanced MaxiCare, index 93.7 93.7 93.7 95.8 96.5 99.8 municipal arrear debt is concentrated in the Free almost R3.7 billion of the total outstanding debt CustomerCare, index 8.2 8.2 8.2 9.8 8.4 8.0 State, Mpumalanga and North West municipalities, (March 2016: R2.3 billion). The process of litigation contributing 49%, 22% and 9% respectively. At year with two of those municipalities continues, while end, 18 of the top 20 defaulting municipalities had customers in the third are being earmarked for Eskom KeyCare and Top Customer KeyCare, which individual overdue debt greater than R100 million conversion to prepaid meters. Five of the Free State measure the satisfaction of our large industrial In an effort to increase local demand, customer municipalities are however honouring their payment each (March 2016: 11). customers, both improved over the year. However, executives and regional managers are engaging arrangements, compared to none a year ago. priority areas identified by the surveys are our with key customers to ascertain their potential to Arrear debt refers only to overdue amounts, excluding increase demand, as well as their ability to expedite Municipal disconnections reliability and quality of supply, as inadequate electricity interest, 18 and not the total amount due. projects and take supply earlier than planned. Just We initiated the PAJA process to disconnect non- supply impacts customer production and expansion over 60% of key customers have been engaged. paying municipalities in November 2016 to encourage initiatives, and the price of electricity, which customers 16 62% defaulting municipalities to pay outstanding overdue consider uncompetitive. During the year, we piloted a winter short-term debt. In a case brought by Afriforum, the High Court 14 Key account executives continue to engage actively incentive sales scheme which resulted in additional ruled in our favour in January 2017, concluding that with large customers to maintain relationships, share sales of 182GWh. Customers participating in the Eskom may disconnect non-paying municipalities. scheme were selected based on their ability to 12 53% important information and identify service-related However, the Minister of Public Enterprises issues. respond strongly to the winter peak price signal. 50% requested that we put the interruptions on hold until We identified operators of electric arc furnaces as 10 31 January 2017, to afford municipalities more time 9.4 The Enhanced MaxiCare perception survey score ideal targets for the pilot. The scheme encouraged to conclude payment agreements or settle their debt. among residential, small and medium-sized customers participants to run additional furnaces from June 8 declined marginally year-on-year. The most common 6.0 During January and February 2017, we intermittently to August 2016, outside of peak periods, or to run 5.0 complaints remain not being adequately informed already-scheduled furnaces for longer periods. 6 interrupted supply to four municipalities in the North about planned electricity interruptions, and how well West Province, two in the Northern Cape and two in we keep to notified dates and times. Nevertheless, 4 Mpumalanga. Interventions between the then Eskom CustomerCare, which measures customer satisfaction Managing arrear debt Interim Group Chief Executive and the Premiers of on a transactional basis based on recent interactions Despite our efforts to ensure that customers pay 4.9 5.3 5.9 North West Province, Free State and Mpumalanga 2 and resolution of queries, improved significantly over their accounts on time and entering into reasonable took place during January and February 2017 to the past year, with satisfaction levels with our contact payment arrangements where necessary, we still address the outstanding debt. centres improving steadily. experience a significant challenge with arrear debt 0 2014/15 2015/16 2016/17 across all customer segments, with municipalities After we threatened to introduce planned supply Revenue and debtor management and Soweto small power users (SPUs) being the interruptions in Lekwa Local Municipality due to its Municipal arrear debt and arrear debt percentage failure to pay its arrear debt, poultry producer Astral Customers are increasingly experiencing adverse largest defaulters. Approximately 61% of our at 31 March 2017, R billion market conditions, negatively impacting revenue and total electricity debtors are considered overdue Foods took Eskom to court, as the interruptions debtors days. Demand from key industrial customers (March 2016: 57%). would have had devastating consequences for Current amounts remains lower than in previous years, largely due Astral’s activities. Eskom and Astral Foods came to Municipal arrear debt (>15 days) to the reduction in output by key customers or an agreement, which was made an order of court. In the closure of customer plants due to the difficult terms of this, Astral Foods will now pay its municipal economic environment. At year end, we had concluded 66 payment electricity account directly to Eskom, and will have agreements with defaulting municipalities, with an uninterrupted power supply. The court ordered adherence being closely monitored. Only six the municipality to pay a portion of its equitable payment arrangements have been fulfilled. Of the 60 share to Eskom. remaining agreements, 31 are being fully honoured 38 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 39 Revenue and customer sustainability continued Soweto and Kagiso split prepaid metering rollout Last year we indicated that we plan to convert all Soweto SPU customers to split prepaid meters by 2019/20. The programme had to be suspended during the local government elections, but has since resumed. During the year, a total of 15 494 split meters were installed in Soweto and Kagiso, while 13 255 meters were converted to prepaid. 6 16% The CustomerCare index improved significantly, reflecting high levels of satisfaction with our contact centres 5 18% Operating performance Disconnection of supply remains the last resort, 16% 4 as we realise that paying customers of the relevant municipalities are severely affected. Nonetheless, where municipalities renege on payment, we will initiate disconnection of supply in line with the PAJA 3 process, until the debt is paid in full. Energy losses Our impact on the capitals 4.0 4.7 5.3 In response to concerns raised by municipalities During the year, total energy losses were 8.85% Social and relationship capital is enhanced by the SRC 2 and SALGA, we have tabled a number of proposals (March 2016: 8.59%). Transmission energy losses supply of electricity to customers, which enables them to various Parliamentary committees. These include performed better than target, at 2.22% (March 2016: to power their homes and businesses. However, we rationalising the number of municipal tariffs, reducing 2.61%), although distribution losses deteriorated quite realise that disconnection of supply to customers has the rate of interest charged on overdue accounts and 1 significantly to 7.55% (March 2016: 6.43%). Losses a detrimental impact on social and relationship capital. changing the payment period on municipal accounts. performance is within international norms. The proposals are being considered by our Board, and Our financial capital is enhanced through revenue and FC if approved, external approvals will be obtained where 0 In excess of 600 000 meter audits were completed subsequent collection of amounts due, although arrear required. 2014/15 2015/16 2016/17 during the year, covering large and small power users debt has a negative impact on financial capital. and prepaid customers. This resulted in R215 million We are involving municipalities to implement a Soweto SPU arrear debt and payment level being billed to recover revenue due to meter pilot project in two provinces to install prepaid percentage at 31 March 2017, R billion tampers, faulty or vandalised metering installations electricity meters for their customers. The project or customers not correctly loaded on the system. aims to improve revenue collection on behalf of these Current amounts Tamper fines of R24 million were also raised. municipalities and enable settlement of municipal Soweto SPU arrear debt (>30 days, excluding interest) electricity bills. Future focus areas • Stimulate demand in LPUs in priority growth We continue to engage with all municipalities, as well industries through a key account management as local and national government stakeholders, to find Smart prepaid metering rollout in Sandton and Midrand approach amicable business solutions for the electricity payment • Increase sales in low-debt, high-growth municipalities defaults. We continue with our decision to convert our post-paid residential customers to prepaid, starting • Improve debt collection by participating in Residential revenue management with Sandton and Midrand. There has been little collection processes on an agency basis in municipal We continue with initiatives to improve revenue resistance from customers to the project, with areas, reinforcing credit control across all customer recovery from residential customers, such as: 14 105 smart prepaid meters being installed during segments and by converting customers to prepaid • Removing illegal connections, conducting meter the year. However, the conversion to prepaid is • Reduce non-technical losses by implementing audits, repairing faulty or tampered meters and behind target, with only 273 meters having been an early warning system, regular and targeted limiting ghost vending of prepaid electricity converted to date. This is partly due to earlier delays meter audits through automating analysis, and • Installing split smart and/or prepaid meters within in the online vending system dependency project, by converting residential customers in Soweto, protective enclosures to prevent tampering and the need to accelerate change management on Midrand and Sandton to split meters • Converting customers from post-paid to prepaid the conversion. Uptake is expected to improve in • Stepping up disconnection of customers not future. honouring their current accounts 40 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 41 Operating performance Operational sustainability Operational sustainability focuses on security of supply, • Attaining a reduction in the delivered cost of coal as well as balancing the electricity supply and demand. • Ensuring the optimal dispatch of coal-fired power Whereas security of supply was the key concern stations, with the more cost-efficient power a year ago, the focus has now shifted to managing stations available (i.e. those with cheaper coal) used surplus capacity. We remain focused on improving the to generate power first generation plant health, and meeting our customers’ expectations while containing costs and complying Of the forecast coal requirement for 2017/18 to with environmental and regulatory requirements. 2021/22, 89% has been secured. Investment in cost-plus mines Looking back on 2016 Almost all the cost-plus mines require significant We continue to collaborate with cost-plus mines investment or recapitalisation in order to increase to increase coal volumes through capital expansion. production and/or maintain existing production. Coal purchase contracts are continually reviewed to Until the collieries can be recapitalised, lower achieve the optimal balance between price, quality and production is expected from these mines. Earlier flexibility. financial constraints have hampered our ability to fund Operating performance Water-supply plans are developed to ensure an this capital expenditure in the past, requiring us to adequate water supply, together with improved purchase and transport more expensive coal. conservation and management of water resources, During the past year, we focused on improvements at although heavy summer rains have alleviated the cost-plus mines that were possible without any capital short-term water supply risk. investment. These improvements, although effective, Generation plant performance made excellent are limited; further capital will be required. We target progress during the year, allowing additional to spend R9.4 billion on financing overdue expansion maintenance to be performed. There was a continued over the next five years. focus on the maintenance and refurbishment of the Recapitalisation will be assessed based on a business transmission and distribution network, in addition case for each mine where long-term benefits can to network strengthening towards the achievement be demonstrated. Increased volumes of acceptable of N–1 Grid Code compliance and the integration of quality coal will reduce the overall coal bill by new capacity, including IPPs. limiting the short- and medium-term coal required. In view of the improved power system status and Furthermore, we will consider financing overdue surplus capacity, the focus of our IDM function is expansion at cost-plus mines to access remaining HIGHLIGHTS CHALLENGES shifting to creating space for future sales growth contracted reserves, thereby increasing production initiatives. and enabling contract extensions. • Coal quality-related load losses reduced by • Maintaining the required coal stock levels at 43% compared to prior year, improving plant all stations, and improving coal quality Securing our resource requirements Coal quality issues availability • Coal production affected by increased Our aim is to safely and sustainably source, procure The Board approved significant enhancements in • UCLF improved by 34% and EAF by 9% community unrest, as well as labour and and deliver the necessary amounts of primary energy contract negotiations and management of coal supply compared to the previous year union activity, increasing the risk of strikes agreements to transfer the risk of coal quality to the at collieries – coal, nuclear fuel, liquid fuels, diesel, water and • Both Koeberg units set new performance supplier. New agreements have more rigorous quality records • Medium-term water supply remains a risk limestone – of the required quality to our power stations, at the right time and at optimal cost. clauses which provide us with more recourse for the • Permanent coal handling plant at Majuba was • Most Generation plant has reached or completed, including the rebuilding of Silo 20 exceeded mid-life, requiring extensive supply of poor quality coal. We are evaluating the • No major Transmission incidents occurred refurbishment Securing our coal requirements feasibility of a multitude of cost-effective technologies during the year • Managing network performance with Coal supply strategy to improve coal quality, such as de-stoning, washing • Renewable IPP capacity of 3 110MW added increasing unplanned outages due to The decline in the global coal price over recent years and screening of coal. since inception overloading from illegal connections, high has resulted in reduced private investment in the coal levels of vandalism and equipment theft Our long-term goal is to determine coal quality at mining industry and fewer suppliers in the market. • Strengthening networks to accommodate the point of delivery. We are advancing the design customer growth due to new connections We continue to support the emerging miner strategy PROGRESS • No new IPP power purchase agreements by procuring from black-owned suppliers wherever of real-time processes and systems to sample and signed since September 2016 given the possible. analyse every coal consignment upon arrival at the • Coal costs were managed within target, and current surplus capacity power stations, prior to offloading, by using coal DNA stringent measures implemented to monitor Board approved the coal supply strategy, which targets characterisation. coal quality the following: • Some capital allocated to fund much needed • Optimising the coal-contract mix by creating a total Kusile coal and limestone contracting status capital expenditure at cost-plus coal mines cost of ownership model for each coal-fired power To ensure the boiler guarantees remain in effect, more • Water security risk mitigated through station, also covering coal-quality specifications stringent coal specifications have been instituted for increased dam levels the commissioning period at Kusile Power Station. • Negotiating new coal-purchase contracts in line • Despite challenges early in the year, the A request for proposal for the coal procurement was system minutes <1 target was achieved with the NERSA cost-of-coal determination, and ensuring an optimal balance between volumes, issued in April 2017, covering both the commissioning • SAIDI and SAIFI performed better than target • A total of 62 demand side management flexibility, quality and lowest price period and the life of the station. We have signed a projects installed, enabling savings of 237MW • Enhancing logistics to drive cost efficiency while long-term contract for the supply of limestone for delivering the road-to-rail migration programme Kusile’s flue gas desulphurisation (FGD) plant, which and securing coal delivery will reduce sulphur dioxide emissions. 42 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 43 Operational sustainability continued Technical performance Water for future power stations Grand Inga Hydro Project The development of new power stations beyond The governments of South Africa and the Democratic Target Target Target Actual Actual Actual Target Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? our current new build programme will need to take Republic of Congo (DRC) signed a treaty for the into account the availability and quality of water establishment of a 4 800MW hydroelectric station Coal burnt, Mt n/a n/a 110.12 113.74 114.81 119.18 resources, climate change impacts and lead times for on the Congo River in the DRC, of which 2 500MW Coal purchased, Mt n/a n/a 117.65 120.25 118.70 121.67 the development of new water supply infrastructure. is allocated to South Africa. We continue to support Coal stock days 37 37 37 74 58 51 DoE in its negotiations with the DRC, and have Road-to-rail migration (additional tonnage For detail of our water usage performance, refer to “Environmental completed and submitted studies on a possible 58.1 15.1 14.6 13.2 13.6 12.6 transported on rail), Mt SC and climate change sustainability – Reducing water consumption” on transmission solution. page 61 for more information 1. Future targets are dependent on system requirements. Generation performance 2. The 2016/17 figure excludes 623kt coal burnt during the commissioning of Medupi Unit 5. Securing our nuclear fuel requirements We aim to optimally operate and maintain our 3. The 2021/22 road-to-rail target is the cumulative target over the next four years, until 2020/21. No target has been set for 2021/22. The existing contracts for the supply of nuclear fuel electricity generating assets for the duration of their fabrication services and the delivery of fabricated economic life. We operate 29 base-load, peaking Coal stock days were significantly higher than target Securing our water requirements nuclear fuel to Koeberg Nuclear Power Station are and renewable power stations with a total nominal largely due to more coal than required being delivered Our short-term water security risk has improved sufficient to cover Koeberg’s demand until 2021/22. capacity of 44 134MW, including the recently Operating performance to Lethabo and Medupi Power Stations. Excluding due to the increase in dam levels in the Vaal River The existing contracts for uranium and enriched commissioned Ingula Pumped Storage Scheme with these, the normalised coal stock days were 38, in line System. The commissioning by DWS of the acid mine uranium to be used as feed for the abovementioned a total nominal capacity of 1 324MW. with the target. drainage project by 2023 and the Lesotho Highlands fuel fabrications are sufficient for100% of Koeberg’s Water Project Phase 2 by 2024 will contribute to demand until the end of 2017 and for about 40% of Generation Sustainability Strategy Lethabo is supplied by a cost-plus mine, where there longer term water security for Eskom. We are committed to accomplishing the overarching demand until the end of 2020. is no financial benefit in reducing coal production. goal of meeting the country’s electricity demand Due to the delays in commissioning units at Medupi, The Vaal River Eastern Sub-system Memorandum Future contracts for the supply of nuclear fuel to at minimum cost. We will continue to improve the current coal requirements are lower than originally of Agreement with DWS was extended to Koeberg will follow the normal commercial process. availability and performance of our generation assets anticipated, although we continue to take coal in 31 March 2019. A new water supply agreement for The contracting and pricing strategy will depend on and optimise our production plan based on the least- terms of the take-or-pay coal supply contract. To the bulk of our water requirements will be concluded the market and prevailing policies. cost merit order dispatch approach, thereby reducing cater for the extra coal, the stockpile height has been once DWS gazettes the revised National Water the usage of the more expensive coal-fired power increased; work to increase the area of the stockpile Pricing Strategy. See note 10 on future fuel supplies and note 20 on inventories in stations. will commence during the coming year. the annual financial statements for further information on nuclear However, the deteriorating quality of raw water fuel balances Our 80:10:10 strategy strives for 80% plant availability Poor quality coal production at two cost-plus mines requires collective action by DWS and water users, by 2019/20, requiring unplanned maintenance to be accounted for 90% of the total coal quality-related including Eskom, to protect water resources and deal Progress on regional gas and hydro projects limited to 10% on average, while performing an average load losses for the financial year. We have initiated with polluters. We are implementing treatment plans Mozambican projects of 10% planned maintenance. Additional capacity measures at these collieries to reduce the extent of to manage this risk. While we remain interested in pursuing hydro, gas coming online through the new build programme and stone contaminating the coal. Overall, coal quality- and transmission projects in Mozambique, further purchases from IPPs creates space for more planned related load losses for the year have reduced by 43% To assist with water security in Gauteng, we have direction is awaited from Mozambique’s Ministry of committed to use the Drakensberg Pumped Storage maintenance and mid-life refurbishments. compared to the prior year. Mineral Resources and Energy about which projects it Scheme to pump at least 285 million cubic metres of wishes to pursue and what role is envisaged for South The average cost per ton of coal purchased has water per year over the next three years from the Africa, and Eskom in particular. increased only 3.5% year-on-year, and was 5.6% Thukela River into the Sterkfontein Dam, which feeds below target. into the Vaal River System. Implementing coal haulage and the road-to-rail Mokolo Crocodile Water Augmentation Project migration plan (MCWAP) Phase 2 The haulage of coal by rail did not meet the annual The MCWAP Phase 2 comprises a pipeline with a target due to a number of Transnet Freight Rail capacity of 75 million cubic metres per annum from infrastructure failures, as well as reduced mine the Crocodile River at Thabazimbi to Lephalale in production following heavy rains in the last quarter of the Waterberg region. It will provide the necessary the financial year. water capacity for coal mines in the region, thereby supporting our coal supply strategy. It will also supply Six coal transport companies contracted to Eskom Medupi’s last three units with the water required for unlawfully introduced additional trucks onto the FGD technology retrofits. Water for the FGDs for road transportation system. This severely prejudiced the first three units will be sourced from the existing other transporters as it deprived them of a fair Mokolo Dam supply. and equitable distribution of coal transportation to various power stations. We terminated the six The project delivery date is now expected to be June contracts with effect from 3 February 2017. 2023, while water is required by the Medupi FGD plant by February 2024, leaving only an eight-month lead The strategy to reduce fatalities associated with the time. The water delivery date is however contingent transportation of coal by road continues to deliver upon the necessary environmental authorisations and results, with no Eskom contractor fatalities recorded approval of funding by National Treasury. during the financial year (March 2016: one). Koeberg Nuclear Power Station continues to be operated safely, well within licensing limits and better than recommended international standards, as demonstrated by long periods of continuous operation (Photo: Bjorn Rudner) 44 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 45 Operational sustainability continued Managing surplus capacity The mix of generating plant types In 2015 we changed the life of some of our generating Any decision on possible decommissioning of Demand for electricity fluctuates throughout the day. Intermediate, or mid-merit plant, is usually available plant from 50 to 60 years. In April 2016, the Board stations will depend on approval of the latest IRP, It is the function of a system operator to balance the only during a specific time of day. Solar PV is a moved away from an age-based decommissioning achieving new build dates as promulgated by the IRP, supply and demand by adding additional capacity to good example, as it is only available during hours strategy to a fleet renewal strategy based on the certainty on demand growth and production from the grid when demand increases and reducing capacity of daylight, and the load profile is fairly predictable economic viability of fleet renewal. IPPs, as well as the completion of socio-economic as demand decreases. (refer to the following graph). studies. Due to surplus capacity, it is not necessary to run Average daily PV profile all our existing plant to meet demand. We prioritise Technical performance Peak load 90 80 which stations to run based on the least-cost merit Generation’s technical performance is assessed in 70 Summer order dispatch approach. We have identified Hendrina, terms of the energy availability factor (EAF) which Average load factor,% Winter Grootvlei and Komati as the stations with the biggest measures plant availability and takes account of: Demand 60 50 cash impact and they will be ramped down to zero • Planned capability loss factor (PCLF), which measures 40 production and placed in lean preservation to minimise energy losses because of planned shutdowns Intermediate load 30 surplus capacity and optimally manage generation • Unplanned capability loss factor (UCLF), which 20 costs: Hendrina in 2018/19, Grootvlei in 2019/20 and measures unplanned energy losses resulting from Operating performance Base load 10 Komati in 2020/21. Should demand growth be higher equipment failures and other plant conditions 0 than current assumptions, these stations could be fully • Other capability loss factor (OCLF) which 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 recalled to meet demand. The timing of the new build measures unplanned energy losses not under the Time of day Coal-fired plant can be used as mid-merit plant by after Medupi and Kusile will be determined by DoE’s control of plant management During a typical day there is a minimum demand, running units in spinning reserve mode (essentially updated Integrated Resource Plan. maximum demand and in-between or intermediate idling) when demand is low. Wind is generally not demand. A system operator can make use of three as predictable as solar PV or base-load plant, as it Target Target Target Actual Actual Actual Target broad types of plant to balance the system: base-load, Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? depends on the strength and consistency of the wind. mid-merit (or intermediate) and peaking plant. Energy availability factor (EAF), % SC 80.00 78.00 72.00 77.30 71.07 73.73 The system operator requires a reserve margin to Planned capability loss factor (PCLF), % SC 10.00 10.00 10.00 12.14 12.99 9.91 A power system should ideally consist of a mix of mitigate against plant unpredictability. The reserve Unplanned capability loss factor base-load, mid-merit and peaking plant. In order to margin is a measure of the available surplus capacity 8.90 10.90 16.90 9.90 14.91 15.22 (UCLF), % minimise costs, the most economical configuration over a peak demand period. Regulators typically Other capability loss factor (OCLF), % 1.10 1.10 1.10 0.66 1.03 1.14 should be applied. require a reserve margin of between 10% to 20% of 1. In accordance with our policy, the performance of Medupi Unit 6 has only been taken into account from September 2016 onwards, being one normal capacity, as insurance against plant breakdowns Base-load power stations can consistently and or a sudden increase in demand.While base-load plant year after commissioning. continuously generate electricity over an extended is required to provide at least the minimum demand, period of time. These are typically large power EAF has improved significantly year-on-year, reflecting (March 2016: 99.19%) and the peaking stations 7.86% units can also be used to supplement the required improved plant performance and availability, as well (March 2016: 20.26%). Eskom’s EUF remains above the stations and use a fuel source such as coal or reserve by operating in spinning reserve. uranium. Base-load plant cannot be stopped or as the improved UCLF. This reflects the impact of international norm, indicating the high levels at which we started quickly and is therefore used to provide the It is important that South Africa has an appropriate the optimised maintenance strategy and reduced are operating our plant, to maintain security of supply. minimum base-load demand required. This plant mix of generation plant in future, to ensure a stable coal quality-related load losses. The commissioning Koeberg performance is also the most economical plant to run over an electricity supply. The mix should take into account of Ingula, the synchronising to the grid of Medupi Koeberg Unit 1 had been online for 474 days and extended period. Although hydro power stations climate change, environmental and socio-economic Unit 5 and Kusile Unit 1 and the increased purchases Unit 2 for 476 days, both exceeding previous records, can provide base-load power and run continuously requirements. We recognise that there is no single from IPPs during the year, have all contributed to when the units went on their respective refuelling over an extended period, this capability is limited in technology option which will meet sustainable increased capacity, providing more space to perform outages in September 2016 and April 2017. South Africa by the availability of water. development goals. In reality these goals are often maintenance. conflicting and trade-offs become necessary. Steam Generator Replacement Project Peaking plant can stop and start quickly and is normally Unplanned breakdowns (UCLF) improved due to the The replacement project for the ageing steam used during short periods of peak demand. Peaking It is difficult to compare plant costs on a like-for-like following: generators forms part of the plant life extension plant includes pumped storage, diesel generators or basis. Two internationally accepted methodologies • Boiler tube leak improvements: Unplanned programme. Rework required on the forgings has OCGTs and gas-fired plant. have been developed to achieve this, namely outages due to tube leaks have decreased by added almost three years to the delivery date of overnight cost of construction and levelised cost of 32%, from 9 313GWh in the previous year to the steam generators for the first unit, now being electricity (LCOE). 6 321GWh in the current year. This was achieved expected in 2021. The manufacturing and assembly by reducing unplanned outage duration and activities are on track in terms of the revised timeline. decreasing the number of tube leaks due to more proactive inspections. The improved coal quality Refer to the information block on page 55 for information on the overnight cost of construction of different types of generation plant and page 86 For benchmarking relating to our coal-fired and nuclear power (partly through lower stone contamination) is a for the levelised cost of electricity stations, refer to the fact sheet at the back of this report major contributor • Partial load losses: Energy lost due to unplanned Update on Duvha Unit 3 over-pressurisation outages resulting from partial load losses has incident decreased by 37% compared to last year The over-pressurisation incident in the boiler of Plant utilisation (EUF) for the year was 74.95% for Unit 3 at Duvha Power Station on 30 March 2014, all stations (March 2016: 82.69%). The utilisation of taking the 575MW unit out of service, continues to coal-fired power stations was 83.18% (March 2016: have a material impact on UCLF, contributing 1.24% 92.66%); Koeberg Nuclear Power Station was 99.80% to the system total. 46 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 47 Operational sustainability continued Managing supply and demand Following the insurance settlement, we have awarded analytics, we optimised the maintenance plan, as it Role of the System Operator contracts for structural repairs, demolition of the allows for more informed decision-making regarding The System Operator performs an integrative of Medupi Unit 5 and Kusile Unit 1 also contributed damaged boiler and construction of the new boiler. the prioritisation of maintenance and rescheduling function for the operation and risk management to available capacity. The complete 765kV network Demolition is expected to be completed early during outages. of the interconnected power system by balancing to the Western Cape was commissioned, enabling the 2018/19 financial year, and the unit is estimated supply and demand in real time, enabling us to security of supply to the region in the event of the to return to commercial operation by the end of the We planned to execute 89 outages during the year. Of those, 51 have been executed (including supply electricity to our customers in accordance loss of both units at Koeberg and contributing to 2022/23 financial year. with our mandate. Protecting the stability of our grid stability. 21 deferred from last year), while 27 have been Maintenance plan deferred and 11 cancelled. An additional 37 power system is of great importance to the System Operator. The various defence systems in place are To manage surplus capacity, the System Operator In line with industry trends, our maintenance unplanned, mainly short-term outages were also required a number of coal-fired units to be placed approach has moved away from prescriptive time- executed during the year. frequently tested to ensure their effective response capability to prevent a major system event. in cold reserve. This is when a generator is taken based maintenance, to condition- and risk-based offline but is available to be called into service at maintenance. This has allowed maintenance to be We plan to execute 75 outages during the coming financial year, with a total of 463 outages planned for There was a sustained improvement of our operating short notice (typically 12 to 16 hours). The number shifted from time-based intervals in terms of the reserve margin over the year, due to capacity of units in cold reserve varies from four to six units Occupation Health and Safety Act, 1993. We now the next five years. added by the Ingula Pumped Storage Scheme and during weekdays, and up to 14 units over weekends. Operating performance assess the health and condition of each plant item, Transmission and distribution IPPs, as well as improved performance of our Units at Grootvlei and Komati Power Stations have together with the consequence of failure, which generating plant. Intermittent production during been placed in extended cold reserve with a call- performance determines the risk. commissioning tests carried out after synchronisation back time of five days. Transmission plans, operates and maintains our Outages will be executed first on high-risk plant transmission assets, while our distribution network Use of open-cycle gas turbines items, even if it is earlier than the prescribed time- relays electricity from the high-voltage transmission based interval, while outages for low-risk plant will be network to customers, including municipalities that Target Target Target Actual Actual Actual Target deferred. Using the Tetris planning tool and advanced manage their own distribution networks. Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? OCGT production, GWh 1 056 211 1 266 29 3 936 3 709 Target Target Target Actual Actual Actual Target OCGT diesel usage, R million1 4 016 690 3 403 340 8 690 9 546 Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? 1. The current year’s cost includes diesel storage and demurrage costs of R280 million, incurred as a result of not running the OCGTs. Number of system minutes lost <1 2. The 2021/22 target is the cumulative target over the next five years. 3.53 3.53 3.80 3.80 2.41 2.85 minute, minutes SC Number of major incidents >1 minute, Energy supplied by IPPs 2 2 2 − 1 2 number DoE’s RE-IPP Programme called for 3 725MW of Slowing electricity demand, coupled with the System average interruption frequency renewable energy to be in commercial operation by combination of commissioning of new capacity 20.0 20.0 20.0 18.9 20.5 19.7 index (SAIFI), eventsSC the end of 2018. and a noteworthy improvement in our operational System average interruption duration performance, have resulted in significant surplus 39.0 39.0 39.0 38.9 38.6 36.2 index (SAIDI), hours SC Although we acknowledge the role that IPPs play capacity, making the future outlook for Eskom Distribution capex for strengthening and in the South African electricity market and remain refurbishment, R million SC n/a n/a 3 477 2 911 2 499 n/a operationally and financially unsustainable, given the committed to facilitating their entry, we have not continued entry of IPPs. 1. One system minute is equivalent to interrupting the entire South Africa at maximum demand for one minute. signed any PPAs since September 2016, given the shift in our generation capacity and demand outlook since We remain committed to connecting IPPs up to bid No major incidents occurred on the Transmission backlogs. Nevertheless, the sustained performance the start of the RE-IPP Programme. window 4.5, as long as they are economical at a price system during the year. The system minutes lost <1 of the distribution network remains at risk given of 77c/kWh or lower, given our surplus capacity. target was attained in spite of the negative impact prevailing resource constraints; this could lead to an The IPP programme must be rolled out at a cost and of a few relatively large incidents involving plant inability to maintain network performance within pace that does not negatively impact the country or failures in the first half of the year. The improvement regulatory norms. Eskom. We are engaging with the relevant government during the remainder of the year was the result departments to reach agreement on the way forward. of successfully implementing a turnaround plan Equipment theft IPPs contracted and connected which focused on improved risk management and The theft of steel members from transmission restoration response. We are developing advanced lattice towers, as well as cable theft and vandalism 2016/17 2015/16 analytics to monitor the health of our transmission of transmission and distribution network equipment Contracted assets. However, performance risks still remain, remain an ongoing occurrence. Treatment actions Total not yet Connected Connected with ageing assets and vulnerabilities due to network include upgrading security at several high-risk and MW contracted connected to date to date unfirmness, which should be addressed as we move critical transmission substation sites, patrols to RE-IPP Programme 4 000 890 3 110 2 145 towards N–1 compliance. prevent incidents on sensitive installations, installation DoE Peaker Programme 1 005 – 1 005 335 of monitoring devices, and the development and SAIFI and SAIDI performed better than target following piloting of technology solutions for lattice towers. Long-term IPPs 5 005 890 4 115 2 480 step-change interventions introduced to manage Short-term IPPs 912 – 912 912 the distribution network performance. We remain Equipment theft is more fully discussed under “Safety and security” Total at 31 March 5 917 890 5 027 3 392 focused on sustainability through refurbishment, on page 65 reliability improvements and addressing maintenance 48 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 49 Operational sustainability continued During the year, we commissioned 965MW of Energy capacity and purchases RE-IPP capacity, slightly less than the expected Considerations around additional IPP capacity The following table summarises the IPP capacity available and the actual energy procured under various IPP 1 030MW, and the 670MW Avon gas peaker, adding The dynamics and assumptions underlying the original programmes for the year to 31 March 2017. IPP capacity of 1 635MW. Projects with signed PPAs RE-IPP Programme have shifted. Slowing electricity are in various stages of construction. demand, adding new build capacity and a significant Target Target Target Actual Actual Actual Target improvement in our operational performance Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? We expect 617MW from bid window 3 of the RE- have resulted in surplus capacity. Further large- Total capacity, MW 6 001 5 521 4 930 5 027 3 392 2 606 IPP Programme to be commissioned during the scale renewables capacity will lead to significant coming year, made up of 511MW wind, 100MW overcapacity on the system, an acceleration of tariff Total energy purchases, GWh 72 639 11 217 12 866 11 529 9 033 6 022 concentrated solar and 6MW of landfill gas. increases for the consumer and stranded assets for Total spent on energy, R million 163 316 23 391 23 051 21 721 15 446 9 454 Eskom. IFRIC 4 accounting adjustment, R million (10 234) (1 999) − (1 964) (340) − Total expenditure, R million 153 082 21 392 23 051 19 757 15 106 9 454 Current prices for RE-IPPs range from 77.5c/kWh to 380c/kWh. Prices in earlier rounds Weighted average cost, c/kWh 225 209 179 188 171 157 were significantly higher, thereby pushing up the 1. The 2021/22 target is the cumulative target over the next five years. MW Contracted Operational average price for the year to 209c/kWh, against 2. The weighted average cost has been calculated on total spent on energy, before the IFRIC 4 adjustment. Operating performance revenue of 83.6c/kWh, which includes transmission Wind 1 994 1 419 and distribution costs. In contrast, our short- Renewable IPPs achieved an average load factor of reliable and economical electricity supply to each of run marginal cost is about 40c/kWh. To be cost 30.7% during the year (March 2016: 30.7%), while its members. competitive, IPPs have to reach more economical the weighted average cost amounted to 209c/kWh Solar PV 1 479 1 474 levels of 77c/kWh or lower. In the long term, (March 2016: 223c/kWh). Access to electricity in all SAPP member states declining costs of renewables are expected to (excluding South Africa) is below 45%, and as low as support an electricity price path that supports We entered into PPAs with the Avon and Dedisa IPP 10% in one instance. Electricity consumption per capita economic growth. gas peakers. For accounting purposes, the capacity in the region lags both South African and global norms. Gas turbines 1 258 1 258 charges are treated as arrangements that contain a Our surplus capacity provided an opportunity for IPP costs are currently a full pass-through to the lease in terms of IFRIC 4. These leases have been additional electricity sales to the region during the year. consumer, negatively impacting electricity prices and assessed as finance leases and are accounted for Concentrated solar power 500 200 ultimately, economic growth. The judgment in the under property, plant and equipment at a value Export growth strategy Borbet case found that the efficiency and prudency Our export growth strategy approved by the of R9.8 billion (March 2016: R3.5 billion). The IPP test must also be applied to IPP costs, therefore full Board received PFMA approval by the Minister in cost for the gas peakers under primary energy Coal 455 455 cost recovery of IPP costs in future is uncertain. was reduced by R1 964 million (March 2016: February 2017. The strategy is to maximise exports through the existing transmission infrastructure, Lower revenues will impact our ability to generate R340 million), while depreciation of R638 million while also building additional transmission lines adequate cash flows to meet existing debt and interest of R1 840 million were charged to Biomass 51 41 to further enable exports. There is considerable commitments. We could be placed in a position the income statement (March 2016: R135 million demand that cannot currently be met due to a lack where we may have to utilise the Government depreciation and R302 million interest). of investment in transmission infrastructure. We are guarantees provided to lenders. This would put the Deemed energy expenditure of R477 million was looking to invest with our regional partners to add Hydro 23 23 Sovereign balance sheet at risk. incurred during the year (March 2016: R24 million), much needed transmission infrastructure. Our capacity being displaced could have many due to delays in grid connection of a number of In line with the mandate received, we have concluded interrelated impacts. A reduced requirement for projects, as well as system curtailment events. Other 157 157 a number of firm power supply agreements at coal will directly affect the coal industry, impacting Cross-border sales and purchases of electricity 31 March 2017, all for a period of five years until the livelihood of communities and mines in areas Non-availability of electricity has been a significant 31 March 2022, for total supply of 450MW. All Total 5 917 5 027 surrounding affected power stations. The full impact impediment to regional growth and development agreements provide for the supply of additional has not been quantified but could have a significant for a number of years; this has been exacerbated by non-firm energy when required. Work to conclude impact on an already distressed economy. the drought affecting most of the SADC region. The additional agreements is ongoing. Any additional IPPs must be assessed against the Southern African Power Pool (SAPP) aims to provide holistic benefits of security of supply, minimising the electricity price, environmental benefits and socio- International sales and purchases economic factors. Without that, there are significant Target Target Target Actual Actual Actual Target risks to introducing additional capacity to the system. GWh 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? We believe that DoE’s assumptions around IPPs should be reviewed. International sales 86 375 15 029 11 918 15 093 13 465 12 000 International purchases 47 203 9 670 10 712 7 418 9 703 10 731 Traditional integrated utilities around the world are Net sales 39 172 5 359 1 206 7 675 3 762 1 269 experiencing financial distress as a result of the large- scale introduction of IPPs. We can learn from their 1. The 2021/22 target is the cumulative target over the next five years. experience to avoid a similar adverse impact. International sales have increased 12% year-on-year. The volume of cross-border purchases was, however, lower than target, primarily because Hidroelèctrica de Cahora Bassa (HCB) reduced its supply as a result of low dam levels due to the drought. 50 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 51 Operating performance Operational sustainability continued Sustainable asset creation Integrated demand management Integrated demand management (IDM) plays a key role in assisting us to balance power supply and demand during periods of constraint, as it encourages customers to use electricity more efficiently. Demand management costs Target Target Target Actual Actual Actual Target R million 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? Total energy efficiency demand side n/a n/a 926.9 375.8 413.0 656.0 management Demand response n/a n/a 398.0 193.9 248.4 308.6 Total (excluding transfer pricing) n/a n/a 1 324.9 569.7 661.4 964.6 1. Future targets are dependent on system requirements. Verified demand side management and internal energy efficiency savings Operating performance Target Target Target Actual Actual Actual Target Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? Demand savings (evening peak), MW n/a 110.0 196.0 236.9 214.9 171.5 Internal energy efficiency, GWh n/a n/a 1.2 6.0 1.7 10.4 In view of the improved power system status and • Strengthen the transmission backbone towards outlook, the focus of the IDM function is shifting from attainment of N–1 compliance, and strengthen balancing electricity demand, to creating space for distribution networks to accommodate customer future sales growth initiatives by shifting demand from growth in support of universal access peak to off-peak periods. • Monitor transmission asset health by developing advanced analytics and optimising maintenance In line with international best practice for power • Execute the Distribution refurbishment plan to system operation, 32 large industrial customers improve the integrity and reliability of the low- participated in our demand response programme, voltage network infrastructure, and transition from which provides the System Operator the flexibility time-based to condition-based maintenance across to manage short-term fluctuations on the grid as priority distribution asset classes and when they occur. The programme achieved • Roll out mobility and real-time dispatching tools HIGHLIGHTS CHALLENGES average certified capacity of 1 267MW during the to improve scheduling, response times and outage year (March 2016: 1 466MW). resolution to Distribution customers • All four Ingula units were commissioned, • Completion of boiler cladding and insulation adding installed capacity of 1 332MW remains a concern at Medupi A total of 2 705 699 compact fluorescent lamps • Continue to reposition the IDM function to • Medupi Unit 5 synchronised in September • Contractor productivity remains an issue (CFLs) were installed in KwaZulu-Natal, Eastern support sales growth initiatives 2016 and achieved commercial operation at Medupi and Kusile, requiring continual Cape, Free State, North West and Gauteng during shortly after year end, adding 794MW supervisory attention to ensure progress Our impact on the capitals installed capacity the year. The Eastern Cape and Free State have Social and relationship capital is positively impacted SRC • Kusile Unit 1 synchronised to the grid on concluded their rollouts. Since inception of the 26 December 2016, ahead of schedule by our support of the coal industry, as well as the current rollout in 2015, a total of 4 765 921 CFLs • Medupi Unit 4 synchronised on 31 May 2017, assistance we provide to the region. However, natural NC have been installed. also ahead of schedule capital is negatively affected by our use of primary • Transmission lines constructed and Future focus areas energy sources, most notably coal and water. substation capacity commissioned exceeded • Effectively implement the coal business strategy, the target Our manufactured capital is diminished through use MC improve management of coal quality from all of the plant, but is restored to some extent through suppliers and maintain the required coal stock maintenance. We apply our intellectual capital in the IC levels at all stations running of our operations, such as through the use PROGRESS LOWLIGHTS • Implement drought contingency plans to mitigate of the Tetris maintenance planning tool. Furthermore, the medium-term water supply risk, until Lesotho we could not operate an integrated power system • A total of R3.9 billion and R328 million • An unfortunate incident occurred during Highlands Phase 2 is commissioned without the use of advanced systems and technology. spent on N–1 and environmental commissioning and optimisation of Ingula compliance respectively, exceeding Unit 3, thereby delaying commissioning • Continue to improve the availability of our the target • Contractor fatality at Medupi generation assets and optimise our production Financial capital is depleted through the costs of FC plan based on the least-cost merit order dispatch running our operations, but enhanced through approach revenue earned. • Optimise maintenance planning using advanced analytics • Continue to evaluate fleet-renewal or preservation options 52 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 53 Sustainable asset creation continued We are executing the largest capital expansion Delivering capacity expansion Overnight cost of construction programme in Africa. We also execute projects to The capacity expansion programme, to build new Comparing the cost of constructing different power plants is challenging, due to difference in size, construction ensure environmental compliance, transmission power stations and increase high-voltage transmission time, inflation, technology, location, etc. Overnight cost is an internationally accepted method used to compare strengthening, customer connections and refurbishing power lines and transformer capacity, started in the construction cost of different power plants on a common basis. of existing assets. Our aim is to deliver on time, 2005 and is expected to be completed by 2022. The within budget and to the desired quality. Overnight cost of construction typically includes costs associated with civils and construction, mechanical programme will increase installed generation capacity equipment, electrical work, control and instrumentation, project management and development. Interest by 17 384MW, transmission lines by 9 756km and Looking back on 2016 capitalised to the project is excluded, while all costs are expressed in a base year by allowing for inflation and substation capacity by 42 470MVA. The biggest commitments we made last year were other adjustments such as exchange rates. in respect of the commissioning of generation Since inception to 31 March 2017, we have increased The cost is usually expressed as a cost per unit of output and converted to the same base year, thereby enabling plant, which we exceeded. We also exceeded the installed generation capacity by 8 363MW, mainly like-for-like comparison. In order to ensure like-for-like comparison, international benchmarks are adjusted to targets for construction of transmission lines and through the return-to-service programme, OCGTs, a common base. A number of organisations provide these benchmarks. commissioning transformer capacity. The dual-fuel Sere Wind Farm, Medupi Unit 6 and most recently, conversion of four OCGT units at Ankerlig and two all four units of Ingula. Transmission lines were USD/kWe (2017 values) Minimum Maximum units at Gourikwa has also been completed. expanded by 6 747km and substation capacity by Lazard 2 520 6 854 34 390MVA. The programme has cost R335.7 billion Operating performance Electric Power Research Institute (EPRI) Excluding FGD, 2 400 Including FGD, 2 990 to date (excluding capitalised borrowing costs). International Energy Agency 1 618 3 064 Medupi (excluding FGD) 2 769 2 900 Kusile (including FGD) 2 906 2 974 Target Target Target Actual Actual Actual Target Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? Generation capacity installed and Medupi Power Station commissioned (commercial operation), 8 696 1 460 666 1 332 794 100 Sadly a fatality was recorded on 5 July 2016, when The principal challenge remains the completion of MWSC a worker on Unit 3 fell from the 63m level to the the boiler cladding and insulation, without which the Transmission lines installed, km SC 2 095.0 677.0 525.0 585.4 345.8 318.6 ground. The investigation into the incident was units cannot be operated safely. The boiler initiative Transmission transformer capacity concluded, and lessons learnt incorporated into agreement, which previously proved successful in 10 775 2 010 1 800 2 300 2 435 2 090 installed and commissioned, MVA SC operations on site. The loss of one life is one too improving contractor productivity, is being extended N–1 compliance - new build, R million SC n/a n/a 2 024 3 917 n/a n/a many. We conveyed our condolences to friends to include Units 3 to 1. Challenges related to project Environmental compliance, R million SC n/a n/a 95 328 n/a na and family. quality issues, the completion of documentation and technical specifications, as well as improving overall 1. The 2021/22 target is the cumulative capacity to be commissioned and/or installed over the next five years. Unit 5 was successfully synchronised to the national contractor productivity, continue to receive close 2. Medupi Unit 5, with an installed capacity of 794MW, attained commercial operation after year end on 3 April 2017, and is therefore not grid on 8 September 2016, ahead of schedule, and management attention. Additional safety, quality reflected in capacity installed above. reached full load on 17 December 2016. After inspection and supervision resources have been completing performance, reliability and compliance deployed to site. The target for spend on N–1 compliance was exceeded, partly due to execution of activities carried over from tests, the unit, with an installed capacity of 794MW, the previous financial year. The target on the Generation coal environmental projects was also exceeded, due attained commercial operation on 3 April 2017, also The cumulative cost incurred on the project is to work on the Camden burners and the Grootvlei and Tutuka fabric filter plant. ahead of schedule, adding 717MW nominal capacity R101.3 billion (March 2016: R93.9 billion) against the Performance on Generation and Transmission capacity installed and commissioned is discussed below. to the grid. revised budget of R145 billion. All amounts exclude capitalised borrowing costs. Capital expenditure (excluding capitalised borrowing costs) per division With Units 6 and 5 successfully handed over for commercial operation, attention is being focused on Kusile Power Station Target Actual Actual Actual maintaining momentum of construction progress on Since the synchronisation of Unit 1 on Division, R million 2016/17 2016/17 2015/16 2014/15 Units 4 to 1. 26 December 2016, the unit achieved full load Group Capital 37 017 35 458 33 799 31 691 of 800MW on 10 March 2017. The focus is on Generation 13 587 14 376 11 440 10 555 Construction progress on Unit 4 is highly optimising the unit to achieve commercial operation, Transmission 1 205 940 998 1 121 satisfactory. The unit achieved the boiler hydro-test which is expected within six to nine months after Distribution 6 338 5 220 5 490 6 073 in June 2016, turbine-on-barring was successfully synchronisation. performed in October 2016, boiler chemical clean Subtotal 58 147 55 994 51 727 49 440 was completed in December 2016, and the draught The project completed hydro-testing of the Unit 2 Future fuel 1 090 114 2 114 1 651 group test in February 2017. First oil and coal boiler in October 2016. After achieving boiler Eskom Enterprises 1 560 1 107 373 439 fires were achieved in March 2017, after which registration ahead of schedule in March 2017, Unit 2 Other areas including intergroup eliminations 3 884 2 817 3 138 1 547 boiler blow through commenced. The unit was is focused on insulation and cladding, mechanical Total Eskom group funded capital expenditure1 64 681 60 032 57 352 53 077 synchronised on 31 May 2017 and remains on track construction, cabling as well as control and for commercial operation within six to nine months. instrumentation (C&I) installation. 1. Capital expenditure includes additions to property, plant and equipment, intangible assets and future fuel, but excludes construction stock and capitalised borrowing costs. The Unit 3 pressure parts work was completed, During March 2017, the distributed control system culminating in a satisfactory boiler hydro-test in was powered on for the air condensate cooling April 2017. Commercial operation is planned for the system, the condensate polishing plant and the flue gas first half of 2019, based on the schedule. desulphurisation (FGD) system, supporting the internal site integration testing. Furthermore, the project has Labour stability on site remains satisfactory, with the mechanically completed and commissioned the first site-specific agreement with formal labour bodies wet FGD on the African continent. under the Eskom Partnership Agreement producing the intended stability. 54 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 55 Sustainable asset creation continued The project continues to closely manage contractor Investing in the future legislation ensures that any nuclear installation is productivity. Performance is improving, most The project won two prestigious awards during the Nuclear safe for humans and the environment. notably through milestones being achieved ahead of annual South African Institute of Civil Engineering Following the section 34 determination by DoE in the business case dates. The new C&I contractor, (SAICE) and South African Forum of Civil Nuclear costs vary greatly across different countries. December 2016, a request for information (RFI) mobilised in 2015, has delivered the engineering and Engineering Contractors (SAFCEC) awards, for Overnight costs range from USD2 021/kWe to for the nuclear new build programme was issued in manufacturing of equipment within tight schedules, most outstanding civil engineering and technical USD6 215/kWe, while the levelised cost of electricity December 2016, and closed on 28 April 2017. to ensure integration with other packages. excellence achievements. ranges from USD40/MWh to USD136/MWh. The Subsequent to year end, the Western Cape High cost of nuclear is competitive compared to other A comprehensive exit and outreach strategy, which Court set aside the determination which formed base-load technologies. The levelised cost of nuclear plans to gradually upskill and release local labour to The upper site at Ingula, expected to be officially power is less sensitive to fuel cost than coal and the basis for nuclear procurement. All current the job market, was formalised in partnership with proclaimed as a nature reserve during the coming gas, ensuring a more stable operational cost. The procurement processes have therefore been key stakeholders. This allows project stability in financial year, consists of approximately 8 000 greatest hurdles to overcome are the significant suspended. This is expected to significantly delay the face of the gradual demobilisation of workers hectares, several hundred of which are wetland. The capital outlay, coupled with continuous investment the nuclear new build programme. once milestones are achieved. It will further enable Ingula Partnership, a 15-year old partnership between required to keep pace with improvements in safety the project to mitigate the risk of local community Eskom, BirdLife South Africa and Middelpunt Wetland standards. The cost of nuclear waste management disruptions. Initiatives include retraining and using Trust, plays an important role in the environmental The business case for nuclear power and decommissioning is also significant. Operating performance projects to keep resources gainfully employed, success story at Ingula. The need for nuclear power arises from a number including the transfer of skills relevant to local of factors, such as climate change, the existing A nuclear programme promotes long-term security The cumulative cost incurred on the project is of supply and environmental sustainability. It can be industry demands. R29.3 billion (March 2016: R26.8 billion) against power generation fleet approaching the end of its useful life, the need for future security of supply, and part of a future electricity generation mix where The cumulative cost incurred on the project is a revised budget of R29.8 billion, approved by these objectives are met in the most affordable way the Board during the year. All amounts exclude maintaining strategic relevance in South Africa and R112.4 billion (March 2016: R95.1 billion) against the Africa. over time. revised budget of R161.4 billion. All amounts exclude capitalised borrowing costs. capitalised borrowing costs. Power lines and substation capacity As close to 85% of our installed generation capacity is from coal-fired power generation, we need to Gas strategy Ingula Pumped Storage Scheme During the year, we installed 585.4km of high-voltage Four open-cycle gas turbine units at Ankerlig and transmission lines and commissioned substation diversify our electricity generation mix over time Units 4 and 3 were synchronised during March to achieve climate change goals. The average age two units at Gourikwa have now been converted 2016. Units 2 and 1 were synchronised on 21 May capacity of 2 300MVA under the new build programme. to dual-fuel capability. The remaining eight units are across our coal fleet is approximately 37 years. and 16 June 2016 respectively. Thereafter, Units 4, Since April 2013, a total of 40 schemes has been Capacity will decline once existing stations retire; expected to be converted by the end of the 2017/18 2 and 1 were successfully commissioned on 10 June, completed, including 13 IPP projects. A scheme refers that capacity will not be replaced at the rate new financial year. 22 August and 30 August 2016 respectively, all ahead to a group of related or similar projects managed in a build is currently being introduced, as it takes a long of schedule, adding an additional 999MW of installed Investing in appropriate technologies coordinated way to realise synergies, e.g. completion of time to develop base-load options. We spent R441 million on Board-approved research peaking capacity to the national grid. the Foskor Acornhoek Transformation Upgrade Scheme. Approximately 10GW of our existing fleet will have projects, testing and development work during the The final generating unit of 333MW installed capacity Other projects to be retired by 2030, based on a 50-year lifespan. year (March 2016: R396 million). became operational on 30 January 2017, when The Duvha Unit 3 boiler structural repairs were Capacity will greatly decline after that; by 2040 Unit 3, which had been damaged during testing in The main project this year was the high-voltage completed in February 2017, followed by pre- approximately 30GW will have to be decommissioned. direct current (HVDC) test facility, which will provide April 2016, was brought into commercial operation. demolition activities in March 2017. The contract No large base-load station beyond Kusile has been us with knowledge and expertise for HVDC use All four units of Ingula are now in commercial for the procurement and fitment of the boiler was allocated to Eskom under the IRP 2010, with IPPs in future transmission expansion projects. Other operation and produce a total of 1 324MW nominal awarded in March 2017. contributing only 900MW in base-load. projects include coal DNA characterisation, off- capacity of peaking power, against total installed The full permanent solution of the Majuba Silo Project, Although life extension of existing power stations grid technologies and control systems, as well as capacity of 1 332MW. including the rebuilding of Silo 20, the reinforcement can postpone the requirement for large new base- refurbishment of the flow laboratory. of Silos 10 and 30, as well as the lift shaft, two piers load plant, it is not a long-term solution, and will Some examples of future projects are: and the coal conveyor system, was returned to service be further limited by environmental laws and cost • Collaborating with electric vehicle (EV) ahead of schedule in December 2016. of compliance. Given the highly regulated nature manufacturers and Government to lower the capital of a nuclear programme in any country, Eskom is cost of entry for new EVs, increase sales of EVs the best state-owned vehicle to implement nuclear in the local market, and develop innovative pricing power in South Africa. This will further secure our models that will help Eskom increase demand and position in the electricity market for many years to shift energy use to more optimal periods come. • Advancing innovative business models for the A likely date for first unit commercial operation deployment of commercial and industrial rooftop is approximately 10 years after the procurement solar PV systems as a product offering to customers process is finalised. Our preferred strategy is to wishing to install their own systems, giving them the pursue a nuclear programme framework agreement option of procuring directly from Eskom with a vendor, which will enable us to commit to • Developing bulk and beyond-the-meter energy two nuclear power units at a time – a phased storage value propositions that will allow us to commitment approach. deploy energy storage technologies at scale, to increase revenue and operational benefits. The The nuclear new build programme will be regulated business case for large-scale storage plus PV by the National Nuclear Regulatory Act, 1999, solutions, as well as off-grid and grid strengthening the National Radioactive Waste Disposal Institute options, will be developed during the coming The Ingula escarpment forms part of the upper site at Ingula, expected to be proclaimed as a nature reserve of approximately 8 000 hectares Act, 2008, and the Nuclear Energy Act, 1999. This financial year 56 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 57 Operating performance Sustainable asset creation continued Environmental and climate Despite operating under complex and evolving change sustainability environmental requirements, we remain committed More on research and development opportunities eMobility to our principle of Zero Harm to the environment. The aim is to stimulate the uptake of electric vehicles or eMobility, through the deployment of charging and other Environmental compliance impacts operational infrastructure, in conjunction with other market players. The environment will benefit and the local economy be sustainability and is critical to maintaining our licence stimulated. Furthermore, the dependency on energy imports (oil for fuel) is reduced. to operate, and supporting security of supply. While Eskom can increase electricity sales, improve asset utilisation and sustain our business into the future, the customer Looking back on 2016 receives increased value from electricity through convenient facilities and services. Our aim to reduce particulate (ash) emissions was Although an electrical vehicle is more economical than a fossil-fuel driven vehicle based on running costs, the initial capital achieved, with performance better than target and outlay and limited distances such vehicles can cover make them less practical, except over shorter distances. prior year. However, water usage related to power station operations did not meet target but was better Smart energy than last year’s performance. This option implements “smart” electricity supply, through enhanced monitoring, better information and advanced control, such as by automatically detecting and reporting outages, giving customers more options to manage demand, consumption An air quality offset plan was approved by DEA and and cost of usage. relevant authorities. Work on implementation of the plan continues. Operating performance The result will be a more inclusive, adaptive and efficient energy market. Eskom will improve asset utilisation and grid stability, also lowering costs, reducing theft and managing debt. The customer benefits from flexibility and choice in Reducing our environmental footprint balancing cost and value of usage, together with more convenience, information and better service levels. We assess our environmental performance in various ways, such as relative particulate emissions, specific Customer generation and storage This considers implementing options for customers to generate and store solar power for their own use, while still having water consumption – namely water usage by all access to the grid when required. HIGHLIGHTS commissioned power stations – as well as the number of environmental legal contraventions. While the environment benefits and the local economy is stimulated, Eskom transforms sustainably, adapting to the • Particulate emissions performance of evolving energy market and the needs of our customers, and starts laying the foundation for the future electricity grid. 0.30kg/MWhSO for the year, substantially Refer to the fact sheet at the back of this report for information on Customers have access to more cost-effective energy options, and an improved ability to manage their energy usage. better than target and prior year the environmental impact of using or saving electricity Reducing particulate and gaseous emissions The particulate (ash) emissions performance for the Future focus areas • Commercial operation of Medupi Unit 4 and Kusile PROGRESS year is substantially better than target and last year’s performance. Although particulate emissions had Unit 1 • Air quality offset programme approved by been increasing over the past five years, there has • Construction of 677km transmission and other DEA and municipal licensing authorities; been a turnaround this year with significantly lower lines, as well as commissioning of 2 010MVA good progress made on pilot project and emissions. Increased opportunities for emission- transmission transformer capacity for N–1 baseline studies related maintenance and repairs done at stations compliance, grid strengthening and expansion during outages, together with a continued focus on • Execution of environmental compliance projects managing emissions performance at individual stations, which include nitrogen oxide, sulphur dioxide and have contributed to the reduction in emissions. fabric filter plants CHALLENGES • Finalising the dual-fuel conversion of OCGTs at Information on gaseous emissions is available in the technical Ankerlig and Gourikwa • Reducing water usage at coal-fired stations statistical tables at the back of the report • Completion of demolition works at Duvha Power • Environmental legal contraventions Station in preparation for reconstruction of Unit 3 significantly worse than target • Identification of areas where battery storage can be deployed at scale across the grid Our impact on the capitals LOWLIGHTS Our manufactured capital is increased through the MC building of new power stations and extending our grid • Increasing red data bird mortalities on capacity, although the funding thereof simultaneously FC power lines depletes financial capital. Social and relationship capital is generally enhanced in SRC the communities surrounding our new build sites, as we contribute to job creation and economic growth in the surrounding areas. Although our activities negatively impact the NC environment and natural capital, the declaration of the Ingula wetlands as a nature reserve will contribute towards maintaining natural capital in that region. We spent R2.9 billion during the year on strengthening and Our research and development work adds to our IC refurbishing our distribution network intellectual capital. 58 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 59 Environmental and climate change sustainability continued Target Target Target Actual Actual Actual Target Approvals for the implementation stage in strategy supports overall financial, environmental and Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? KwaZamokuhle, Ezamokuhle and Sharpeville have operational sustainability by working with relevant been obtained and contracts are being placed. stakeholders in addressing both the country’s and our Relative particulate emissions, kg/MWh sent out SC, 1 0.21 0.34 0.35 0.30 0.36 0.37 The baseline establishment has almost been particular water challenges. Specific water consumption, ℓ/kWh concluded, which will inform the design of the offset sent out SC, 2 1.30 1.37 1.38 1.42 1.44 1.38 interventions. The first phase of interventions in All power stations have developed water strategy Net raw water consumption, Mℓ n/a n/a n/a 307 269 314 685 313 078 KwaZamokuhle is planned for late 2017. The rollout implementation plans, focusing on actions to reduce of interventions in Ezamokuhle is expected to start water use and ensure compliance. Progress against Environmental legal contraventions the plans is being monitored and reported, and initial in terms of the Operational Health 1 1 1 − 1 1 early in 2018. Work to identify sources of ambient air Dashboard, number3 pollution in Sharpeville has commenced. This work actions have been closed out. will help in the design of the offset interventions for Water usage 1. In accordance with our policy, the performance of Medupi Unit 6 has only been taken into account from September 2016 onwards, being one year after commissioning. Lethabo Power Station. Water usage related to power station operations for 2. Water consumption figures still exclude Medupi Unit 6, as unit specific meters are not yet available at Medupi Power Station. An NEMA section 30 performance the year was slightly worse than target but better approach is being developed to allow the inclusion of performance without unitised meters. than last year’s performance. Hot, dry conditions for The atmospheric emission licences issued to power 3. In defined circumstances where the management of an environmental legal contravention indicates specific management issues or failings, it is much of the year contributed to high water usage. recorded on the Eskom Operational Health Dashboard. stations require the reporting of unexpectedly high Operating performance atmospheric emissions in terms of section 30 of Inefficiencies at power stations, including excessive 4. Future targets are dependent on system requirements. the National Environmental Management Act, 1998 system leaks and poor water management practices, (NEMA). A total of 48 of these incidents occurred remain an area of concern and focus. Atmospheric emission licences (AELs) We continue with the implementation of our Board- Majuba and Matla, as well as the FGD plant retrofit at during the year, an improvement from 59 reported in Collieries decanting mine-affected water approved emission reduction plan in order to meet Medupi Power Station. the previous year. Power stations have operated under The Kilbarchan Colliery continues to decant mine- air quality standards by 2025 and comply with conditions where section 30 is triggered for 2.24% of affected water, although the pilot water treatment commitments made to environmental authorities. A condition of DEA’s approval of our application for the time during the year (March 2016: 6.6%). plant is operational on site. We are working on a Changes to the plan have been communicated to DEA. postponement of the Minimum Emission Standards AEL sulphur dioxide (SO2) emission limits for Medupi request by DWS to expand the treatment plant. compliance timelines was the development and A further fabric filter plant retrofit at Grootvlei implementation of an air quality offset programme, and Matimba are being exceeded due to the high Reducing environmental legal contraventions Power Station was completed, resulting in to improve ambient air quality (especially particulate sulphur content of coal used by these stations. An There were no Operational Health Dashboard significantly lower relative particulate emissions. matter levels) in communities close to Eskom‘s application to increase the SO2 limit in the AEL will be contraventions (as defined earlier) reported The final unit’s retrofit commenced in April 2017. power stations. submitted to DEA in the coming year. during the year. There were, however, 28 legal Work at Tutuka and Kriel is in progress. Ashing facilities and ash utilisation contravention incidents identified (March 2016: 20), An Eskom air quality offset plan for communities Our exemption applications to allow for a period of worse than the target of 24. There were 17 water- Planning for the installation of high frequency adjacent to our coal-fired power stations, with four to six years after authorisation to install linings related incidents, six related to emission licences, transformers to reduce particulates is progressing a nominal cost in excess of R4 billion over the at Matla and Duvha Power Stations, while Lethabo, at the Majuba, Kendal, Tutuka and Matimba dry-ashing three biodiversity-related and one each to waste next nine years, was approved by DEA and the Kendal and Matimba are on track for construction facilities have all been approved. and conservation. relevant licensing authorities in the affected district from 2021 to 2025. Development work continues for municipalities in September 2016. The pilot project Work around the beneficiation of ash and the Provisions for environmental restoration and low NOx burner retrofits or replacement at Tutuka, in KwaZamokuhle was concluded during the year. execution of the ash strategy approved by the Board rehabilitation continued this year, focusing on increasing our ash We continue to provide for the estimated sales. This has resulted in a slight improvement in decommissioning cost of nuclear plant, including our ash utilisation to 8.46% (or 2 760kt) for the the rehabilitation of the associated land, as well as year (March 2016: 8.32% or 2 712kt). We are liaising for the management of nuclear fuel assemblies and with DEA to obtain waste management exemptions radioactive waste. Provision is also made for the for businesses wishing to make use of our ash for decommissioning of other generating plant and the brick and block making. This will create jobs and rehabilitation of the associated land. new skills while continuing to ensure responsible environmental management. Furthermore, where a constructive or contractual obligation exists to pay coal suppliers from cost-plus Reducing water consumption mines, provision is made for the estimated cost of Our strategy closure at the end of the life of the mine, together The Board has approved a comprehensive water with pollution control and rehabilitation of the land. strategy for all coal-fired power stations based on our strategic user status being maintained and The following provisions have been raised for applicable water legislation complied with. The environmental rehabilitation and restoration: Actual Actual Actual R million 2016/17 2015/16 2014/15 Power station-related environmental restoration – nuclear plant 17 650 12 677 10 982 Power station-related environmental restoration – other power plant 12 643 8 339 7 705 Mine-related closure, pollution control and rehabilitation 11 706 8 580 5 465 Total environmental provisions 41 999 29 596 24 152 Beneficiation of ash resulted in ash utilisation of 8.46% (or 2 760kt) for the year, in line with our Board-approved ash strategy Refer to note 29 in the annual financial statements for more information on these provisions 60 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 61 Operating performance Environmental and climate change sustainability continued Safety and security Biodiversity Carbon budgeting We remain committed to the principle of Zero Harm, The Board approved the declaration agreement and DEA requested projected emissions for 2016 to which means that no operating condition or urgency management plan for Ingula as a nature reserve, which 2020 in order to determine carbon budgets. DEA of service justifies exposing anyone to risk as a result were submitted to the MECs of KwaZulu-Natal and has granted us a favourable carbon budget for the of exposure to our business or causing them injury, the Free State for final approval. We expect that the period, and we achieved the 2016 carbon budget by or damage to the environment. It requires a work nature reserve will be declared during the coming year. a comfortable margin. However, until such time as environment which supports the health and safety of we are allocated additional lower carbon-emitting everyone, by building strong relationships with our A total of 502 red data bird mortalities were recorded technologies through the IRP process, the ability to employees, contractors, suppliers and the community. on our transmission and distribution infrastructure reduce our liability relating to the pending carbon tax this year (March 2016: 391). We initiated a proactive is a concern. We pledge to care for and protect all people exposed strategy last year, aimed at prioritising which lines to our operations, through the belief that any would be most vulnerable to bird collisions. It is We shared the impact of the carbon tax on workplace injury or disease is preventable. expected that it will take some time before the electricity tariffs up to 2023/24 with National strategy bears fruit. Treasury, NERSA and the DoE’s IPP Office. National Looking back on 2016 Treasury indicated that a revised Carbon Tax Bill Over the past year, safety-related initiatives have Investing in renewable energy should be available for public comment during 2017. brought about improvement in many areas, especially Operating performance We continue to deliver on our commitment to regarding workforce safety and contractor safety environmental sustainability and reducing our carbon Future focus areas management. Our database of OHS-compliant footprint with purchases of renewable energy from • Continued implementation of the emissions suppliers has increased significantly through ongoing IPPs, coupled with our own investment in renewables. reduction and air quality offset plans, coupled with supplier safety evaluations. Comprehensive analysis Renewable energy sources include wind, solar power, increasing ash utilisation of all contractor safety incidents is conducted on a biomass, landfill gas and small hydro technologies. • Reduce water use and ensure compliance with monthly basis, and shared with safety managers within water licence conditions through power station PROGRESS the respective divisions. For capacity provided by renewable IPPs, refer to pages 49 and 50 water strategy plans • Maintain the focus on reducing red data bird • Large-scale public safety awareness Focus on safety campaigns to educate the public about the Sere Wind Farm contributed 345GWh to the national mortalities dangers of unsafe electricity use continue grid during the year (March 2016: 311GWh), with In memoriam • Security partnership was established a load factor of 37.63% and an availability factor of Our impact on the capitals between Eskom and a number of mines in Our heartfelt condolences to the families, friends and 99.65% (March 2016: 34.10% and 97.67% respectively). Although both our emissions and water usage deplete NC the Gauteng mining corridor to detect and colleagues of the following people who lost their lives The small hydro plants in the Eastern Cape recorded natural capital, the introduction of carbon budgets and prevent crime in the line of duty: total energy sent out of 20GWh during the financial the air quality offset programme attempt to limit the Employees Contractors year (March 2016: 71GWh). impact, as does the declaration of the Ingula Nature Reserve. Emissions in particular negatively affect Makhosonke Martin Mbele Adam Grgic There are eight rooftop and ground-mounted PV sites Dumisani Israel Mlaba Olwethu Mkosane the communities surrounding our coal-fired power CHALLENGES Bongimpilo Terrence Mnguni Loyiso Ncwadi in operation at our power stations and administration stations, thereby diminishing social and relationship SRC buildings, which produced total energy sent out of capital. Melusi Edwin Nkosi Daniel Simango • LTIR deteriorated despite safety 4.19GWh during the year. The Mkondeni rooftop improvement initiatives and leadership Lohatlin van Niekerk project was transferred into commercial operation on Costs incurred in managing our environmental FC engagement sessions André Williams 31 March 2017. performance deplete our financial capital. • Our OHS performance remains a priority due to the lost-time injuries and fatalities Our safety performance is assessed in terms of the Climate change recorded number of fatalities among employees and contractors, South Africa’s pledge at COP 21 • Compliance with the Construction Regulations 2014 across the organisation as well as the lost-time injury rate (LTIR), which is a South Africa’s pledge at COP 21 requires the country’s remains a concern proportional representation of the occurrence of lost- CO2 emissions to stabilise by 2025, and then to decline • Public demonstrations and picketing actions time injuries per 200 000 working hours over a period from 2035. Electricity historically accounts for around at our facilities remain a threat for the of 12 months. 44% of national CO2 emissions. To achieve this, the foreseeable future country will need to invest in lower or zero-emitting technologies, as the current coal-fired electricity generation fleet reaches the end of its life. LOWLIGHTS A concerted effort is therefore required to focus on technologies such as nuclear, cleaner coal technologies, • The number of fatalities, although less than renewables, gas and large hydro imports. The trade- 2016, remains a concern offs between technologies must be discussed and rationalised to arrive at an appropriate electricity mix. This will be informed by the updated Integrated Resource Plan 2016 once it is finalised by DoE. 62 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 63 Safety and security continued Target Target Target Actual Actual Actual Target Public safety education We are implementing a number of initiatives to Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? Our public safety programme aims to educate the combat equipment theft: public on the dangers of electricity and encourage • Copper conductor is being replaced with aluminium Fatalities (employees and contractors), number − − − 10 17 10 the safe use thereof, while also inspiring employees conductor, with unique markings Fatalities (public), number1 − − − 20 27 27 to be public safety ambassadors. We have assisted • Normal bolts on pylons will be replaced with anti- Lost-time injury rate, index (including the Department of Basic Education with the theft bolts, and support lattices on steel pylons are 0.31 0.31 0.31 0.39 0.30 0.33 occupational diseases) – group development of new Life Orientation textbooks for marked with Eskom’s name Lost-time injury rate, index (excluding 0.30 0.30 0.30 0.28 0.27 0.28 Grades 1 to 9 that will cover electricity safety. • Alarms are installed on the overhead lines. If the occupational diseases) – group line is cut or tampered with, an alarm is triggered National Electricity Safety Week is hosted annually and a reaction unit is despatched to the location 1. The number of public fatalities reported in March 2016 increased from 25 to 27 due to reclassification of incidents after internal audit and reviews. to educate communities about the basics of safe • Air surveillance of hot spots is conducted at night electricity usage and the risks of electricity theft, The number of contractor and public fatalities A total of 270 lost-time injuries (LTIs) including including meter tampering or bypassing, and illegal We are implementing a security modernisation reduced compared to the prior year. Unfortunately, occupational diseases was reported during the connections. We continue to conduct large-scale strategy based on a technology-centric approach to despite our intense commitment to safety, we suffered year (March 2016: 202). Excluding occupational public safety educational awareness campaigns ensure higher operational effectiveness and improved four employee fatalities (March 2016: four) and six diseases, 191 LTIs were reported (March 2016: which include school and community visits, radio security conditions across Eskom, including our Operating performance contractor fatalities (March 2016: 13). The causes of 188). A concerted effort was made to ensure that interviews, agricultural and construction forums, as National Key Point sites. fatalities are shown below: all occupational disease incidents are duly reported well as engagements that cover commercial and large and investigated. As a result, the index including power users, counsellors, clinics, hospices, radio Due to the evolving cyber-threats facing organisations occupational diseases has increased significantly year- interviews and municipalities. These public safety today, we are establishing a cyber-security solutions 2 2 on-year. centre, to implement and maintain protective campaigns have yielded positive safety improvement performance between the two years. mechanisms and take action where required. Safety programmes We are continuing with various programmes and Nuclear safety Future focus areas initiatives aimed at improving our safety performance. The Koeberg Nuclear Power Station plant design • Cascade leadership safety conversations to all These programmes are regularly revised to ensure that and resultant assessment of risk to the public remain levels of the organisation 1 2016/17 safety is prioritised, maintained and, where practical, • Focus on incident prevention and sharing key well within licensing limits and better than the continually improved. recommended international standards. Operational learnings in safety communications practices at Koeberg are not challenging the design • Continue to drive OHS compliance amongst Safety leadership conversations were implemented suppliers 3 boundaries or assumptions; there is no current across Eskom, focusing on safety performance specific • Target high-incidence areas and focus on unacceptable nuclear risk due to the design or to divisions. We have a comprehensive OHS training educating children about unsafe electricity usage 2 operation of Koeberg. The interaction between and development programme including a supervisory in public safety programmes relevant oversight organisations and line management safety leadership course. • Reduce incidences of cable theft is continually monitored by the related governance Causes of employee and contractor fatalities As motor vehicle accidents remain one of the main and nuclear oversight bodies; these organisations are Our impact on the capitals contributors to both LTI incidents and fatalities, a having a positive impact on nuclear safety and our The impact of fatalities and LTIs on human HC Vehicle accidents Contact with heat comprehensive vehicle safety programme is in place. efficiency. capital, for employees and contractors, and social Electrical contact Drowning A recent initiative is Drivecam, a video monitoring Falls from heights The Koeberg units continue to be operated safely, and relationship capital for public incidents, is SRC device used in conjunction with existing vehicle with solid technical performance demonstrated by significantly negative. Safety programmes aimed at monitoring devices to identify at-risk behaviour, in long periods of continuous operation. reducing incidents attempt to diminish the impact. order to improve driver behaviour. We focus on 2 specialist driver training and vehicle safety reviews. Financial capital is also affected by these incidents, due Security FC In addition to experiencing economic crime in general, to days lost and the impact on morale and productivity Contractor management 1 5 we also find ourselves the target of organised crime in the wake of an incident. Incidents of theft also Due to the vital role that contractors play in our syndicates. We also lose a significant amount of diminish financial capital. operations, contractor safety management remains a priority. Contractor safety initiatives have been revenue due to illegal connections and ghost vending. Educating people on safer ways of working, and IC communicated throughout the organisation. Line Losses due to conductor theft, cabling and related coming up with innovative ways to improve safety 2 2015/16 divisions host contractor safety forums to share equipment totalled R70 million for the year performance, positively influences intellectual expectations and lessons learnt; line divisions are (March 2016: R85 million), involving 5 734 incidents capital. responsible for monitoring compliance. (March 2016: 5 161 incidents). Actions to combat 2 Through stakeholder engagement, OHS has been these losses are managed by the Eskom Network formally integrated into our commercial process. All Equipment Crime Committee in collaboration with 3 potential suppliers undergo OHS evaluations prior affected state-owned enterprises and the South 2 African Police Service. The combined effort resulted 3 to being registered on the Eskom vendor database. Contractors who commit a serious safety non- in 235 arrests (March 2016: 229) and R5 million Causes of employee and contractor fatalities conformity are investigated and sanctioned. worth of stolen material was recovered (March 2016: Vehicle accidents Falls from heights R5 million). Progress was made in the arrest of a Electrical contact Assault/gunshot We continue to engage with the Department of Labour number of syndicates targeting network infrastructure Caught between or under objects Contact with heat and South African Council for the Construction components of state-owned enterprises, including Struck by or against an object and Project Management Professions to ensure that Eskom. adequate measures are in place for the professional registration of construction health and safety personnel. 64 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 65 Operating performance Building sustainable skills In order to sustain the business, we aim to recruit, Target Target Target Actual Actual Actual Target develop and retain appropriately skilled, committed, Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? engaged and accountable employees. Our focus is Engineering learners 1 602 391 456 1 480 895 1 315 on driving a culture of performance and creating Technician learners 2 670 652 760 1 209 415 826 a productive workforce, which includes building a Artisan learners 5 873 1 434 1 673 2 155 1 955 1 752 strong learner pipeline. Learner intake SC 2 500 500 685 3 048 1 370 n/a Looking back on 2016 Training spend as % of gross employee 5.00 5.00 5.00 4.89 4.45 6.18 We continue to recruit learners and facilitate training benefit costs SC for our employees to address identified competency 1. The 2021/22 target is the cumulative target over the next five years. gaps. The targets for closing competency gaps and 2. Learner intake is a new measure with effect from 1 April 2016. It refers to new learner appointments and learners with new contracts. leadership behavioural change were achieved during the past year. Nevertheless, this remains a high priority, with targets set for the next five years. The Tertiary Education Support Programme (TESP) Number of employees 2016/17 supported universities and universities of technology Building strong skills to deliver engineering learning interventions. Some Headcount at 1 April 2016 47 978 Operating performance Our learner pipeline is one of our critical development examples of these include the real-time digital Add: Appointments 1 505 areas, not only sustaining our supply of skills, but also Less: Resignations (849) simulator at Durban University of Technology, the Retirements (649) supporting the country’s socio-economic upliftment. SMART grid centre at the University of KwaZulu- Deaths in service (191) Overall, 12.5% of the total Eskom company staff Natal, the High-Voltage Cable Centre at Vaal Dismissals (132) complement consists of learners, against a target University of Technology, high-voltage interventions Separation packages and other (4) HIGHLIGHTS of 8%, a level which is more than sufficient to meet at Wits University and Stellenbosch University, the future demand for core, critical and scarce skills, renewable energy at the University of Cape Town and Headcount at 31 March 2017 47 658 • Exceeded shareholder targets for all as well as the organisation’s needs due to normal asset management at the University of Pretoria. categories of learners attrition. The breakdown of our workforce at 31 March 2017 Training based on age is shown below. Furthermore, we supported 3 048 learners this The Eskom Academy of Learning (EAL) has been year (March 2016: 1 370), far exceeding target. In training 100 learner recruits in the one-year Age distribution of workforce Number % PROGRESS addition, RI.54 billion was spent on training and warehouse skills programme. The objective of the 18 to 19 – – development (March 2016: R1.25 billion). programme is to mitigate the attrition of employees 20 to 29 6 272 13.16 • Training spend amounts to 4.89% of gross within supply chain operations in Group Commercial 30 to 39 19 720 41.38 employee benefits costs, just below target in the next five years. A total of 60 positions were 40 to 49 10 148 21.29 We have been at the forefront of learner • Continued the Eskom Employee Engagement reserved to be filled by the successful learners. 50 to 59 8 579 18.00 Programme to rebuild the relationship with pipeline management for many years; this has 60 and over 2 939 6.17 employees been acknowledged by a number of accolades A five-year agreement for the Eskom Power Plant • Income differentials exercise, to identify received including EWSETA and our state-owned Engineering Institute (EPPEI) Programme Phase II was Total 47 658 100.00 discrepancies based on gender and race, was counterparts. We pride ourselves on our ability concluded at the 2016 PowerGen Africa Conference. concluded to build a strong learner pipeline to satisfy the It follows Phase I of the programme, which ended in For information on the racial and gender breakdown of our requirements of our future needs based on our December 2016. workforce, refer to “Transformation and social sustainability – workforce plan. Improving internal transformation” on page 72 CHALLENGES The SANEA (South African National Energy This pipeline has proven to be imperative for both Association) Awards 2016 took place in Johannesburg In terms of our strategic initiative aimed at cost internal and external deployment in support of the in September 2016. The Eskom Academy of Learning • Reducing the headcount in order to align to reduction, we are targeting a reduction in the Eskom the strategy National Skills Accord. We continue to support the EPPEI initiative received a highly commended company workforce to 36 746 by 2021/22. We have National Development Plan and the National Skills recognition, in the category for SANEA Energy reviewed the workforce plan, focusing on retention Accord by ensuring that South Africa has a strong Education Award. of core, critical and scarce skills across the business, skills base to satisfy future requirements. Headcount while reducing non-essential positions. We continue to upskill and provide qualification- The Eskom group headcount at year end was driven training and development to young South Remuneration and benefits 47 658 (March 2016: 47 978), including permanent Our approach to remuneration and benefits Africans. All trained learners will be equipped with staff and fixed-term contractors, and consisting of a recognised qualification which will enhance their is designed to attract and retain skilled, high- 41 940 Eskom employees and 5 718 Eskom Rotek performing executives and employees. We aim to ability to enter the business environment, whether Industries employees (March 2016: 42 767 and 5 211 at Eskom or elsewhere. remain competitive by providing market-related respectively). Of these, approximately 84% are remuneration structures, benefits and conditions of covered by collective bargaining agreements. service. Employees are remunerated in accordance The reconciliation of our headcount is shown with their job grade, at least at the minimum of the below. Staff turnover during the past year was applicable salary scale. We guarantee internal equity approximately 4%. through reasonable differentials in remuneration and benefits, and resolve unjustifiable race- and gender- based income differentials if they arise. 66 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 67 Building sustainable skills Operating performance continued Transformation and social sustainability Remuneration structure Our remuneration structure for bargaining unit and The Eskom Employee Engagement Programme managerial level employees is set out below. We established the Eskom Employee Engagement Programme in 2015. It uses various platforms Bargaining unit to ensure that we rebuild relationships with our Bargaining unit employees, being all those below middle employees, to increase employee engagement levels management, receive a basic salary plus benefits. Major and create a harmonious workplace. The programme benefits include medical aid, a housing allowance and is aimed at enabling and empowering employees to membership of the Eskom Pension and Provident feel a sense of connection to the business and one Fund, as well as a thirteenth cheque. Basic salaries another, thereby driving a culture of performance. and conditions of service are negotiated through the collective bargaining process. Bargaining unit employees The programme has received positive feedback and participate in an annual short-term incentive scheme. realised many successes. Highlights during the year include the 2016 Eskom Chairman’s Awards, where the Managerial level focus was on harnessing internal talent; the release of Managerial level employees are remunerated on the 100th Eskom Employee Engagement Bulletin to the a cost-to-company basis. The package includes Operating performance business; an unprecedented response rate of 42.6% pensionable earnings, compulsory benefits and a to the annual Eskom Employee Engagement Survey; residual cash component. Managerial employees also the Group Chief Executive’s country-wide employee participate in an annual short-term incentive scheme, engagement roadshows; the inaugural 2016 Eskom consisting of rewards for achieving objectives set Women’s Conference; and the Eskom Heritage by the Group Chief Executive and approved by the Month Good Food and Beverage Show. People and Governance Committee. The overarching theme of employee engagement Incentive scheme is summed up in the Ryunosuke Satoro quote, Our short-term incentive scheme aims to align “Individually, we are one drop; together, we are an individual performance with strategic organisational ocean”, which emphasises the impact of leadership, initiatives, by setting targets for KPIs that contribute vision alignment and synergy to drive optimal to these initiatives. Key performance areas focus performance at all levels of the organisation. on financial sustainability, improved operations, safety, compliance and the achievement of new build milestones. All permanent employees participate in Future focus areas the scheme. • Focus on four areas in support of our objectives, namely workforce optimisation, increasing HIGHLIGHTS CHALLENGES The size of the bonus pool is determined by Eskom’s employee engagement, and reducing both overall performance. The bonus pool is further manpower costs and headcount • Our CSI programmes benefited 841 845 • Underrepresentation of women at influenced by four factors: qualifiers (for managerial beneficiaries (March 2016: 302 736) professional and middle management level level) or a primary bonus driver (for bargaining unit Our impact on the capitals • A total of 55 353 learners and teachers remains a concern employees), operational modifiers, gatekeepers as Human capital is largely improved through training, HC benefited from our maths and science • Achieving racial equity at senior programmes management, as well as professional and well as a qualitative rating. while employees personally benefit through the • Eskom Contractor Academy produced middle management levels, still poses a remuneration and benefits they receive, although this FC 150 graduates challenge The bonus paid to an individual is derived by taking diminishes financial capital. • Achieved 207 189 electrification connections • People living with disabilities continue into consideration the available pool amount, the to be underrepresented at supervisory, (target: 199 714), partly enabled by the use of respective group or division’s achievement, team live-line techniques professional and managerial levels performance and the individual’s performance. An on-target bonus equates to 12% of basic salary for bargaining unit employees, 16.67% of pensionable earnings for middle managers and 25% for senior managers. PROGRESS LOWLIGHTS Income differentials An independent exercise was conducted to • Significant progress was made in improving • Procurement spend for a number of determine whether employees at the same level gender equity at senior management level supplier categories remains significantly are equally remunerated, despite gender, race • Procurement spend with black-owned and below target and disability. A number of discrepancies were black women-owned suppliers exceeded discovered, for which a provision of R475 million target was raised at year end. The required adjustments still have to follow our internal governance process. Employee relations The overall Industrial Relations Index has improved in terms of grievances resolved, disciplinary actions with sanction and disputes referred to external institutions Our gender equalisation plan strives to equalise the gender gap by 2020 which are ruled in our favour. 68 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 69 Transformation and social sustainability continued We play a critical role in skills development and Looking back on 2016 The Foundation approved funding of over half a million Electrification economic empowerment, as mandated by our We continued to drive supplier development and Rand for intercommunication systems for four schools The DoE funded electrification programme continues shareholder. We aim to transform society through localisation. Although not yet meeting target, the in the George area of the Western Cape. The main to connect previously disadvantaged households our supplier development and localisation drive, as spend with black youth-owned enterprises, those benefits of such a system are the security it offers, in our licensed areas of supply. The majority of the well as corporate social investment in community owned by black people with disabilities, qualifying and the improvement of communication to learners electrification programme is now being implemented education, health and developmental projects. Our small enterprises and exempted micro enterprises all and educators. The beneficiaries are Imizamo Yethu in more remote and deep rural areas, where the most direct contribution to transformation remains showed an improvement compared to the prior year. Secondary School, Tembalethu Secondary School, construction of network infrastructure is challenging, through the rollout of Government’s electrification George High School and Parkdene Secondary School. on difficult terrain and therefore more expensive. programme. While gender equity has improved year-on-year, with gender equity in senior management improving In March 2017, we participated in the 2030 NDP The implementation of the Distribution Performance significantly, much work remains to be done. Career Expo hosted by DPE. Minister Lynne Brown Centre has enabled the excellent connection commented that CSI programmes help shape the performance this year, with eight of the provinces Maximising our socio-economic contribution competitive business environment in which we operate. exceeding their annual electrification target, with only the Eastern Cape not meeting target. Furthermore, Target Target Target Actual Actual Actual Target Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? the average cost per connection has decreased to Contractor Academy helps upskill Cape Town R14 271 (March 2016: R18 236). The results are a clear Operating performance Corporate social investment committed, entrepreneur 924.6 192.0 225.3 225.3 103.6 115.5 indication that we have changed gear to deliver on the R million Glynn Mashonga, the owner of GlobesScope Corporate social investment, number of aim of universal access to electricity. beneficiaries 1 750 000 350 000 400 000 841 845 302 736 323 882 Security Solutions, successfully completed the Eskom Contractor Academy accredited course. She heard Electrification of grid schools and clinics Total electrification connections, number1 729 914 201 200 199 714 207 189 158 016 159 853 about the academy when her company competed After the schools contract with the Department of and became a finalist in the Business Investment Basic Education (DBE) was signed in October 2016, 1. The 2021/22 target is the cumulative target over the next five years. Competition in 2015. we resumed electrification of schools. However, 2. The reporting boundary for the number of connections was changed in March 2014, to exclude farm worker connections. A total of 247 farm worker connections were also completed during the year, resulting in a total of 207 436 connections being achieved. some schools were found to be vandalised and some GlobesScope Security Solutions was established in either closed or in the process of being closed. 2012 and is based in Cape Town. Glynn started the These have been reported to DBE through regular Corporate social investment company after working for a security company and engagements. During the year, our CSI activities impacted 841 845 deciding to venture out on her own. The company beneficiaries with a committed spend of R225.3 million installs sophisticated electronic security systems in Our contribution to supplier (March 2016: 302 736 beneficiaries and committed tertiary institutions, corporates and homes in the development spend of R103.6 million). The number of beneficiaries Western Cape. Products include alarms, access Our procurement and supply chain management increased due to a number of interventions with a control, CCTV systems, electric fences, gate is led by the Chief Procurement Officer. The policy national footprint. automation, etc. As a qualified technician, Glynn framework and strategic sourcing is guided centrally, does most of the product installations herself. whilst execution is managed at various sites. Project Sourcing provides specialised support to new build Eskom competition winner achieves international The Contractor Academy is the Foundation’s projects, whilst Strategic Sourcing seeks to maximise recognition programme to equip small business owners and total cost of ownership by placing key strategic Tshibvumo Sikhwivhilu, CEO and co-owner of Lamo entrepreneurs with the necessary skills required to contracts across our value chain. Special emphasis is Solar, was nominated by the Wits Business School build sustainable businesses, as part of our support placed on supplier development and localisation to for the International Entrepreneurial Venture Award of Government’s initiatives of job creation, skills transform the supplier base, whilst industrialising key held by the Association of MBAs in London, after development and poverty alleviation. It is offered supply sectors. he completed his Master of Business Administration to contractors and suppliers wishing to improve (MBA) degree at the institution. He researched the their skills in project and financial management, During the year, we placed a total of 5 388 contracts role of distributed generation of renewable energy entrepreneurship, legislation and technical acumen to with 2 937 suppliers (March 2016: 2 892 contracts as a tool to fast-track energy access in rural parts of sustain and grow their businesses. Between 2010 and with 1 656 suppliers). Our total procurement spend South Africa, and the capabilities required to lead such 2015, contracts totalling R2.3 billion were awarded to (including primary energy) amounted to R178.1 billion innovation. contractors who graduated from the Academy. for the year (March 2016: R169.8 billion). In late 2016, his company won first prize in the The programme was awarded two international Procurement equity performance engineering and construction category of Eskom’s Global Best Awards by the International Partnership Our group and company procurement equity performance is set out Business Investment Competition. This achievement Network in Oslo, Norway, in September 2016, in the non-technical statistical tables at the back of the report helped open more doors for this budding and highly namely the Africa Gold Winner: Entrepreneurship ambitious entrepreneur. and Enterprise Skills, as well as the Overall Global We created 39 277 jobs at 31 March 2017 through Thematic Winner: Entrepreneurship and Enterprise the capacity expansion programme at the Medupi, Tshibvumo and his partner, Elmond Khoza, established Skills. The programme also won the local Trialogue Lamo Solar in 2012. Based in Randburg, the company Kusile and Ingula new build sites and Power Delivery Strategic CSI Award in December 2016. Projects (March 2016: 23 169). The expected provides renewable energy solutions, specialising in solar PV installations. The duo, who are passionate demobilisation at these sites has not yet materialised about the energy sector, started their company to due to delays at these projects. For more information on our CSI initiatives, please refer to the help address the energy challenge facing South Africa Foundation’s report for the 2016/17 year, which is available online The annual targets for procurement spend with and the sub-Saharan African region. They have seen B-BBEE compliant suppliers, black-owned and their venture grow to make life easier for many South Winning the Business Investment Competition opened many black women-owned companies were met. The Africans by bringing them electricity. doors for Tshibvumo Sikhwivhilu, CEO of Lamo Solar performance can be attributed to the implementation of the new B-BBEE measurement spend directive, 70 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 71 Transformation and social sustainability continued Financial review which excludes spend with renewable IPPs as it does a transfer of design know-how in order to stimulate not qualify as discretionary spend. The collection local industrialisation through knowledge transfer. 74 Chief Financial Officer’s report and maintenance of valid B-BBEE certificates Particular areas of focus in the current financial year 76 Value added statement further reduced the procurement spend with non- include power plant air quality-related technology 77 Condensed annual financial statements compliant suppliers. retrofit projects such as low NO x burners, FGD 81 Key accounting policies, significant plant and fabric filter plant. An on-the-job training judgements and estimates The attributable spend with black youth-owned approach for overall boiler design is being executed enterprises, those owned by black people with to ensure that skills development is effectively 83 Financial sustainability disabilities, qualifying small enterprises and exempted executed over time. A total of 54 people benefited micro enterprises performed below target, although from skills development initiatives, while 69 jobs performance has improved compared to the previous were created (March 2016: 29 and 54 respectively). year. Due to the implementation of the new B-BBEE Improving internal transformation Codes of Good Practice, certain elements can no Employment equity remains one of the key processes longer be considered when calculating total measured through which meaningful transformation can be procurement spend. realised. Our Employment Equity Plan aims to Technology transfer transform our workforce profile at all occupational We have acquired intellectual property (IP) worth levels. R31 million (March 2016: R54 million) and undertook Employment equity performance for the group Target Target Target Actual Actual Actual Target Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? Racial equity in senior management, % of 83.06 71.39 72.00 65.80 61.06 61.70 black employees Racial equity in professionals and middle 85.34 78.22 78.00 73.50 71.68 71.77 management, % of black employees Gender equity in senior management, % 42.35 35.64 36.00 36.58 28.13 29.82 of female employees Gender equity in professionals and middle 43.66 39.59 40.00 35.98 35.11 35.29 management, % of female employees Eskom group disability, % 2.50 2.50 2.50 2.93 2.73 2.89 We have made significant progress in improving gender business is disability-friendly, managers will be equity in senior management during the current encouraged to recruit and promote more employees year. Measures are in place to support women with disabilities, including exposing all managers in their new roles as part of the broader retention and employees to disability awareness training. strategy. Racial equity in senior management has also Ensuring that facilities are accessible and allowing shown good progress over the past year. However, for reasonable accommodation in the workplace the underrepresentation of women at professional remains a challenge due to our national footprint. and middle management level remains a concern. The slow progress is a result of limited recruitment Future focus areas opportunities due to our cost-reduction initiatives. • Implement CSI initiatives in large Eskom infrastructure development sites to improve the Our total workforce comprises 68% male and 32% sustainability of projects female employees at all occupational levels, unchanged • Prioritise electrification, with one million from the prior year. households to be connected over five years, with We have developed an ambitious and rigorous universal access targeted by 2019/20 gender equalisation plan, which strives to equalise • Advance transformation of the supplier landscape the gender gap by 2020 through the Eskom Women through the Eskom spend, increasing the capability Advancement Programme (EWAP). It is envisaged and capacity of black suppliers that opportunities which arise due to attrition will • Strive to equalise the gender gap by 2020 by be targeted and reserved for women. reserving vacancies arising through attrition for women To support the drive towards transformation, employment equity and gender awareness training Our impact on the capitals HC is being rolled out across the business to sensitise Human capital is enhanced by our efforts to improve employees on the requirements of the Employment racial and gender equity in our workforce. Similarly, Equity Act, 1998. social and relationship capital is enhanced through SRC our procurement equity efforts, CSI initiatives and The overall picture regarding people with disabilities electrification of households. remains a concern, as they are represented mainly at lower occupational levels. To ensure that the However, all of these deplete financial capital. FC 72 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 73 Chief Financial Officer’s report Financial results for the year Our funding requirement for the year under review Liquidity management is critical to ensure our status The business has achieved above-target financial was reduced from an original amount of R68.8 billion as a going concern. We will continue to engage key performance over the past year, despite a challenging due to savings in the business. We therefore only customers, specifically municipalities, to recover arrear operating environment and a price increase of 9.4% borrowed R57.4 billion for the year. For the 2017/18 debt. Operational cash flow is expected to show being awarded for 2016/17, against a budget of 13%. financial year, funding sources of R71.7 billion have strong growth over the next five years. The performance reflects a concerted effort by the been identified, of which R38.3 billion (including committed bank facilities), or 53%, had already been The impact of the latest downgrades of Eskom’s business to improve efficiencies, resulting in cost secured at 31 March 2017. credit rating, directly or as a result of the recent reduction and increasing cross-border sales supported downgrade of the Sovereign to sub-investment by improved plant performance. Our credit ratings were downgraded further during grade, could also have a negative impact on the For the year ended 31 March 2017, the group achieved the financial year, and again since year end, largely sourcing of funding, as access to investment-grade a net profit after tax of R0.9 billion (March 2016: driven by uncertainty around Government’s ability mandates utilising Government guarantees may R5.2 billion, restated). Group EBITDA (earnings to provide timely support should Eskom require drastically reduce. However, we have maintained Our strategy – financial sustainability before interest, tax, depreciation, amortisation it. National Treasury has extended the current a very conservative debt portfolio that has not and funding and fair value adjustments on financial instruments Government guarantee framework agreement to yet been severely impacted by previous ratings We launched the DTC strategy last year as an and embedded derivatives) of R37.5 billion shows 31 March 2023. downgrades. Although current market conditions extension of our turnaround plan, to extract further a substantial increase (March 2016: R32.8 billion, remain supportive, the cost of funding is also likely efficiencies from the business, through a reduction restated). The electricity EBITDA margin has Outlook to be adversely impacted by the downgrades. further improved to 21.44% (March 2016: 20.29%, Key to enhancing Eskom’s financial health is improving in primary energy costs, restricting other operating the EBITDA margin to at least 35% over the medium We have to repay interest of R213 billion over the costs to inflationary increases, and rephasing and restated). This is largely due to the 9.4% average to long term, through a combination of driving local next five years, with debt repayments of R200 billion, optimising capex. In its first year of implementation, electricity price increase, growth in export sales and export sales, delivering on cost efficiencies by with a peak of R63 billion in 2020/21. Cash interest DTC has already delivered significant success as we volumes, and containing primary energy costs. limiting price escalations in key inputs such as coal cover and debt service cover ratios will both come achieved the stability required to navigate changing Group revenue amounted to R177.1 billion costs, and ultimately migrating to a cost-reflective under pressure as debt servicing increases over industry dynamics. (March 2016: R164.2 billion, restated). Although electricity price. the medium term. Nevertheless, cash flow from As discussed earlier, our strategy focuses on five overall sales volumes have decreased by 0.2% against operations is expected to be sufficient to cover debt the prior year, export sales volumes have increased However, the successful execution of our strategy and interest payments. critical targets over the medium term, namely: by 12.1%. Primary energy costs of R82.8 billion will be at risk should any of the interventions not • Achieving average annual growth of 2.1% in local materialise as planned. Although debt funding of R338 billion is required over demand and 8% in export sales are slightly lower than the prior year (March 2016: the next five years to finance expansion, strengthening • Reducing primary energy spend by R43 billion R84.7 billion). The increase in total coal costs Financial review Given the pressure on NERSA not to increase the of networks, environmental requirements and • Optimising planned capex spend by R25 billion (including environmental levy) was contained to electricity tariff significantly, coupled with our sizeable servicing debt, we remain confident that our funding • Delivering a R6 billion EBITDA improvement 5.4%, while spending on OCGTs reduced drastically, debt service commitments, our only options are to target will be achieved. through advanced analytics leading to an 8.5% reduction in own generation costs. focus on internal cost efficiencies and sales growth • Releasing R105 billion in Government guarantees, IPP expenditure has increased even further due to programmes to offset our significant fixed-cost base. The group has access to adequate resources and while maintaining a moderate electricity price higher volumes being produced, although the average Even with aggressive cost cutting, a substantial price facilities to continue as a going concern for the path over the medium to long term cost per unit has also increased by about 10%. increase of approximately 20% is required, whether foreseeable future. The increase in operating expenditure to R58.4 billion once-off or phased in over time. Regulatory certainty remains a key driver of our Our financial position has improved over the past financial sustainability. Whilst we remain committed (March 2016: R49.1 billion) is driven largely by However, low economic growth, customer concerns few years and is expected to improve further, to providing an affordable and sustainable electricity an increase in employee benefit costs and other about affordability, as well as uncertainties in the given successful implementation of our strategy. price path to support the economy, we also require operating expenses. Depreciation has increased to electricity industry will see NERSA encountering The main focus over the medium term will be to longer term revenue certainty. The High Court R20.3 billion (March 2016: R16.6 billion, restated) resistance to significant price increases in 2018/19 increase sales volumes and reduce costs, in order decision in the Borbet case has resulted in NERSA due to new plant being commissioned. BPP savings and beyond. As a result, the price of electricity will to improve profitability. The biggest challenge will granting us an average increase of only 2.2% for of R20.2 billion (March 2016: R17.5 billion) were still not reflect its cost; this will have an even greater be to moderate the electricity price increase while 2017/18, expected to result in a cash flow deficit of achieved against a target of R17 billion; inception-to- negative impact on our financial health. Although strengthening our financial position. The ultimate approximately R21 billion over the coming year. On date savings amount to R48.7 billion against a target no further credit enhancement mechanisms are goal is to achieve a standalone investment-grade 4 May 2017, we appealed the High Court decision. of R43 billion. Group capital expenditure (excluding expected from Government, further shareholder credit rating, which will allow us to release R105 The SCA judgment on 6 June 2017 upheld the appeal DoE funded capex) amounted to R60 billion for the support may have to be considered should our billion in Government guarantees. in favour of NERSA and Eskom. The RCAs for year (March 2016: R57.4 billion). revenue not improve significantly, as the only 2014/15 and 2015/16 of R19.2 billion and R23.6 billion other option is additional borrowings, which would The group’s liquidity position remains healthy, with respectively were on hold pending the outcome of further weaken our key financial ratios. liquid assets – comprising cash and cash equivalents the appeal. We await feedback from NERSA on the plus investment in securities – of R32.5 billion at We currently have surplus generating capacity way forward. year end (March 2016: R38.7 billion), due to higher available, which may necessitate decisions about the Anoj Singh NERSA has allowed us to make a one-year capex spend, offset by increased cash generated from decommissioning of power stations, which would Chief Financial Officer application for 2018/19; this will require an affordable operations. negatively impact our cash flow. Our short-run tariff to sustainably provide for both the RE-IPP marginal cost – which is relevant in times of surplus Given the improvement in operational performance, Programme and our own costs. During the 2013/14 capacity – is far below the price we pay for IPP most key financial metrics show an improvement RCA process, we were criticised for our inability to production, negatively affecting our financial position. against the prior year. However, of concern is the forecast sales volumes and for getting operational It makes sense to decelerate the RE-IPP Programme fact that although EBITDA has improved substantially, and cost performance fundamentally wrong. We will until such time as the surplus capacity has been net profit after tax has declined due to increased ensure that key assumptions for the next revenue reduced. depreciation and net finance cost. application cycle are more realistic. 74 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 75 Value added statement Condensed annual financial statements for the year ended 31 March 2017 for the year ended 31 March 2017 2017 2016 The group and company financial results set out in the condensed financial statements which follow have been Rm Rm extracted from the Eskom Holdings SOC Ltd consolidated annual financial statements for the year ended 31 March 2017, which have been prepared in accordance with International Financial Reporting Standards (IFRS) Revenue 177 136 164 239 and in the manner required by the Companies Act, 2008. Other income 1 608 2 433 Less: Primary energy and other operating expenses (109 529) (104 917) The consolidated annual financial statements have been prepared under the supervision of the Chief Financial Officer, Mr Anoj Singh CA(SA), and were duly approved by the Board of Directors on 15 June 2017. Value added 69 215 61 755 Finance income 5 212 3 447 The consolidated annual financial statements have been audited by the group’s independent auditors, Wealth created 74 427 65 202 SizweNtsalubaGobodo Inc. in accordance with the Public Audit Act of South Africa, 2008, the General Notice issued in terms thereof and International Standards on Auditing; they issued a qualified opinion relating to Value distributed 75 947 63 956 compliance with PFMA and completeness of irregular expenditure. The consolidated annual financial statements are fairly presented, except for the qualification. Benefits to employees 36 833 32 523 Social spending to communities 201 99 The consolidated annual financial statements, which detail the financial performance of the group and company, are available online Finance costs to lenders 37 822 30 792 Taxation to Government 1 091 542 The financial statements may also be inspected at Eskom’s registered office; limited copies are available on request. Value reinvested in the group to maintain and develop operations (1 520) 1 246 Any reference to future performance plans and/or strategies included in the integrated report has not been Depreciation and amortisation 20 300 16 633 reviewed or reported on by the group’s independent auditors. Borrowing costs capitalised (18 233) (19 426) Employee costs capitalised (3 655) (3 266) Deferred tax (820) 2 154 Condensed income statements Net profit 888 5 151 for the year ended 31 March 2017 Wealth created 74 427 65 202 Group Company Restated Restated Value created, R million 2017 2016 2017 2016 Revenue per employee 3.72 3.42 Rm Rm Rm Rm Value added per employee 1.45 1.29 Wealth created per employee 1.56 1.36 Continuing operations Financial review Value added per GWh generated 0.31 0.28 Revenue 177 136 164 239 177 136 164 239 Other income 1 573 2 390 2 094 2 471 Number of employees and fixed-term contractors 47 658 47 978 Primary energy (82 760) (84 728) (82 760) (84 728) GWh generated 220 166 219 979 Employee benefit expense (33 178) (29 257) (27 902) (24 721) Net impairment loss (1 669) (1 170) (1 629) (1 159) 4 Other expenses (23 570) (18 663) (30 950) (25 170) Profit before depreciation and amortisation expense and net fair value 37 532 32 811 35 989 30 932 13 398 loss (EBITDA) Depreciation and amortisation expense (20 300) (16 633) (20 277) (16 619) 12 440 Net fair value loss on financial instruments, excluding embedded 3 (3 342) (1 452) (3 203) (1 492) derivatives 15 341 14 001 Net fair value gain on embedded derivatives 1 611 997 1 611 996 Profit before net finance cost 15 501 15 723 14 120 13 817 10 602 22 187 Net finance cost (14 377) (7 919) (15 389) (8 776) 9 787 2 Finance income 5 212 3 447 4 290 2 667 20 776 Finance cost (19 589) (11 366) (19 679) (11 443) Share of profit of equity-accounted investees after tax 35 43 – – Profit/(loss) before tax 1 159 7 847 (1 269) 5 041 1 Income tax (271) (2 696) 399 (1 905) Profit/(loss) for the year1 888 5 151 (870) 3 136 1. A nominal amount is attributable to the non-controlling interest in the group. The remainder is attributable to the owner of the company. 0 Refer to note 49 in the consolidated annual financial statements for detail of the restatement of comparatives 16 17 16 17 16 17 16 17 5/ 6/ 5/ 6/ 5/ 6/ 5/ 6/ 1 1 1 1 1 1 1 1 20 20 20 20 20 20 20 20 R million Revenue per employee Wealth created per employee Value added per employee Value added per GWh generated 76 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 77 Condensed annual financial statements continued Condensed statements of comprehensive income Condensed statements of financial position for the year ended 31 March 2017 at 31 March 2017 Group Company Group Company Restated Restated Restated Restated 2017 2016 2017 2016 2017 2016 2017 2016 Rm Rm Rm Rm Rm Rm Rm Rm Profit/(loss) for the year1 888 5 151 (870) 3 136 Assets Other comprehensive (loss)/income (7 298) 6 508 (7 269) 6 481 Non-current assets 622 331 567 960 622 683 568 873 Items that may be reclassified subsequently to profit or loss (7 464) 5 903 (7 426) 5 884 Property, plant and equipment and intangible assets 592 848 523 659 593 296 524 713 Future fuel supplies 8 190 10 502 8 190 10 502 Available-for-sale financial assets – net change in fair value 60 (57) 50 (54) Investment in equity-accounted investees and subsidiaries 364 360 479 479 Cash flow hedges – effective portion of changes in fair value (9 225) 8 829 (9 225) 8 829 Derivatives held for risk management 16 868 27 600 16 868 27 600 Net amount transferred to initial carrying amount of hedged items (1 140) (603) (1 140) (603) Investment in securities 1 537 2 485 1 537 2 485 Foreign currency translation differences on foreign operations (45) 21 – – Other assets 2 524 3 354 2 313 3 094 Income tax thereon 2 886 (2 287) 2 889 (2 288) Current assets 78 879 86 268 78 797 87 644 Items that may not be reclassified subsequently to profit or loss 166 605 157 597 Inventories 22 359 17 821 22 156 17 641 Remeasurement of post-employment medical benefits 231 840 218 830 Loans receivable 14 10 6 187 6 352 Income tax thereon (65) (235) (61) (233) Derivatives held for risk management 1 000 2 582 1 000 2 582 Trade and other receivables 19 379 21 810 20 609 24 455 Total comprehensive (loss)/income for the year (6 410) 11 659 (8 139) 9 617 Investment in securities 10 541 7 741 5 167 2 067 Financial trading assets 2 919 3 844 1 730 2 657 1. A nominal amount is attributable to the non-controlling interest in the group. The remainder is attributable to the owner of the company. Other assets 2 242 4 006 1 984 3 754 Cash and cash equivalents 20 425 28 454 19 964 28 136 Condensed statements of changes in equity Non-current assets held-for-sale 8 799 8 942 70 148 for the year ended 31 March 2017 Total assets 710 009 663 170 701 550 656 665 Group Company Equity 175 942 165 964 Financial review Restated Restated Capital and reserves attributable to the owner of the company 182 352 174 103 2017 2016 2017 2016 Rm Rm Rm Rm Liabilities Non-current liabilities 453 777 405 039 453 275 404 265 Restated balance at the beginning of the year 182 352 118 419 174 103 112 212 Debt securities and borrowings 336 770 306 970 336 690 306 901 Previously reported 180 563 117 164 172 314 110 957 Embedded derivatives 4 032 5 410 4 032 5 410 Prior year restatements, net of tax 1 789 1 255 1 789 1 255 Derivatives held for risk management 6 767 2 862 6 767 2 862 Profit for the year 888 5 151 (870) 3 136 Deferred tax 18 067 21 696 18 090 21 317 Other comprehensive (loss)/income, net of tax (7 298) 6 508 (7 269) 6 481 Employee benefit obligations 13 790 12 405 13 458 12 094 Share capital issued – 23 000 – 23 000 Provisions 44 021 32 841 43 908 32 826 Converison of subordinated shareholder loan to equity – 29 274 – 29 274 Finance lease payables 9 819 3 838 9 819 3 838 Deferred income 17 700 15 516 17 700 15 516 Balance at the end of the year 175 942 182 352 165 964 174 103 Other liabilities 2 811 3 501 2 811 3 501 Comprising: Current liabilities 78 607 73 971 82 311 78 297 Share capital 83 000 83 000 83 000 83 000 Cash flow hedge reserve 4 160 11 622 4 160 11 622 Debt securities and borrowings 18 530 15 688 22 017 19 056 Available-for-sale reserve 6 (37) 2 (34) Embedded derivatives 1 382 1 615 1 382 1 615 Unrealised fair value reserve (11 873) (16 712) (11 873) (16 712) Derivatives held for risk management 3 826 2 011 3 838 2 024 Foreign currency translation reserve (6) 39 – – Employee benefit obligations 7 348 5 190 6 848 4 997 Accumulated profit 100 655 104 440 90 675 96 227 Provisions 9 057 11 415 8 573 11 198 Trade and other payables 31 782 32 319 33 059 33 739 Total equity 175 942 182 352 165 964 174 103 Financial trading liabilities 1 620 1 250 1 620 1 250 Other liabilities 5 062 4 483 4 974 4 418 Refer to note 49 in the consolidated annual financial statements for detail of the restatement of comparatives Non-current liabilities held-for-sale 1 683 1 808 – – Total liabilities 534 067 480 818 535 586 482 562 Total equity and liabilities 710 009 663 170 701 550 656 665 Refer to note 49 in the consolidated annual financial statements for detail of the restatement of comparatives 78 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 79 Condensed annual financial statements Key accounting policies, significant judgements and estimates continued Condensed statements of cash flows Key accounting policies Capital contributions received from for the year ended 31 March 2017 Our condensed annual financial statements do not customers include all the information required for full financial Contributions received in advance from electricity Group Company customers to construct infrastructure dedicated statements and should be read in conjunction with the Restated Restated consolidated annual financial statements for the year to them are recognised as other revenue once the 2017 2016 2017 2016 ended 31 March 2017, which have been prepared on customer is connected to the electricity network. Rm Rm Rm Rm the going concern basis. Government grants Cash flows from operating activities Profit/(loss) before tax 1 159 7 847 (1 269) 5 041 The separate and consolidated annual financial Government grants received for the creation of Adjustment for non-cash items 47 932 29 162 47 985 29 980 statements are prepared on the historical cost basis, electrification assets are first recognised in liabilities Changes in working capital (1 730) (2 201) (276) (2 305) except for certain items that are measured at fair as deferred income, and thereafter credited to profit value. or loss within depreciation and amortisation expense Cash generated from operations 47 361 34 808 46 440 32 716 on a straight-line basis over the expected useful lives Net cash flows (used in)/from derivatives held for risk management (1 787) 643 (1 700) 622 We have consistently applied the accounting policies of the related assets. Interest received 1 342 2 322 1 342 2 322 to all periods presented, except for new or revised Interest paid (22) (11) (22) (11) statements and interpretations implemented during Impairment of non-financial assets Income taxes paid (1 053) (520) – – the year, the impact of which is detailed in the full set The carrying amounts of property, plant and equipment Net cash from operating activities 45 841 37 242 46 060 35 649 of consolidated annual financial statements, as well as and intangibles are reviewed at each reporting date restatements due to a change in the way we account to determine if there is any indication of impairment, Cash flows from investing activities for distribution assets developed by third parties. or when events indicate that the carrying amount Proceeds from disposal of property, plant and equipment 398 360 388 302 Acquisitions of property, plant and equipment and intangibles (57 259) (54 175) (56 572) (54 164) may not be recoverable. Servitude rights, that are Expenditure on future fuel supplies (639) (1 754) (639) (1 754) considered to have an indefinite useful life, are not We did not correctly account for certain distribution subject to amortisation or depreciation but are tested Increase in payments made in advance (99) (274) (99) (274) assets that were developed by third parties and annually for impairment. Expenditure incurred on provisions (6 890) (3 054) (6 890) (3 054) transferred to Eskom in prior years. This error was Net cash flows from derivatives held for risk management 389 771 389 771 Decrease/(increase) in investment in securities and financial corrected in the 2017 annual financial statements Finance income 496 (1 886) – – as a prior period restatement. We accounted for Finance income comprises interest receivable on loans, trading assets Interest received 1 221 1 202 546 559 the assets transferred to Eskom in terms of the advances, trade receivables, finance lease receivables Other cash flows from investing activities 97 220 235 336 requirements of IFRIC 18: Transfers of assets from and income from financial market investments, and is customers. The distribution assets were recognised recognised as it accrues using the effective interest Net cash used in investing activities (62 286) (58 590) (62 642) (57 278) Financial review as property, plant and equipment at fair value in rate method. Cash flows from financing activities terms of IAS 16: Property, plant and equipment, Debt securities and borrowings raised 50 994 41 052 51 073 41 840 while revenue was recognised in terms of IAS 18: Finance cost Payments made in advance to secure debt raised (1 096) (555) (1 096) (555) Revenue, as other income. Finance cost comprises interest payable on borrowings, Debt securities and borrowings repaid (7 034) (11 123) (7 072) (11 013) interest resulting from hedging instruments and Share capital issued – 23 000 – 23 000 interest from the unwinding of discount on liabilities. Net cash flows (used in)/from derivatives held for risk management (7 738) 11 847 (7 738) 11 847 Certain of our key accounting policies are set out To the extent that assets are financed by borrowings, Net cash flows used in investment in securities and financial trading below. certain borrowing costs are capitalised to the cost (660) (1 621) (660) (1 621) assets and liabilities of assets over the period of construction until the Interest received 2 365 1 275 2 328 1 250 Refer to note 2 in the consolidated annual financial statements for asset is substantially ready for its intended use. The Interest paid (28 788) (22 791) (28 888) (22 944) our significant accounting policies weighted average of borrowing costs applicable to all Other cash flows from financing activities (188) (157) (188) (99) borrowings is used, unless an asset or part thereof is Net cash from financing activities 7 855 40 927 7 759 41 705 Determination of fair value financed by a specific loan, in which case the specific Net (decrease)/increase in cash and cash equivalents (8 590) 19 579 (8 823) 20 076 Fair values are based on quoted bid prices if available, rate is used. Cash and cash equivalents at the beginning of the year 28 454 8 863 28 136 7 986 otherwise valuation techniques are used. Foreign currency translation (45) 21 – – Property, plant and equipment Foreign currency translation Property, plant and equipment is stated at cost less Effect of movements in exchange rates on cash held 647 75 651 74 Foreign currency transactions are translated into Rand accumulated depreciation and impairment losses. Cash and cash equivalents transferred to non-current assets held-for-sale (41) (84) – – using the exchange rates prevailing at the date of the Land is not depreciated; other assets are depreciated transaction. Non-monetary items are measured at using the straight-line method to allocate their cost Cash and cash equivalents at the end of the year 20 425 28 454 19 964 28 136 historical cost. Foreign loans are remeasured to spot to their residual values over their estimated useful rate at every reporting date. lives. Spare parts classified as strategic and critical Refer to note 49 in the consolidated annual financial statements for detail of the restatement of comparatives Revenue spares are treated as property, plant and equipment. We earn revenue through the sale of electricity Repairs and maintenance is charged to profit or loss to customers. Revenue is recognised when the during the period in which it is incurred. electricity is consumed by the customer, but only to the extent that it is considered recoverable. 80 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 81 Financial review Key accounting policies, significant judgements and estimates continued Financial sustainability Financial assets Embedded derivatives Looking back on 2016 Non-derivative financial assets are initially recognised We have entered into agreements to supply electricity Our financial performance improved further over at fair value net of any directly attributable transaction to electricity-intensive businesses, where the revenue the past year, with most key financial metrics showing costs and subsequently measured per asset category. from these contracts is linked to commodity prices, improvement. We also exceeded our cost savings Thereafter, held-for-trading financial assets are foreign currency rates or foreign production price target under the BPP Programme. recognised at fair value through profit or loss; loans indices, giving rise to embedded derivatives. The fair and receivables are measured at amortised cost using value of embedded derivatives is determined by Despite a challenging funding environment, impacted the effective interest rate method less accumulated using a forward electricity price curve to value the by credit ratings downgrades, we managed to maintain impairment losses. host contract, while the derivative contract is valued our liquidity buffer and successfully executed our by using market forecasts of future commodity borrowing programme. We continue to engage with Financial liabilities prices, foreign currency exchange rates, interest rate ratings agencies to address their concerns around Non-derivative financial liabilities are initially differentials, future sales volumes, production price our highly leveraged financial profile, regulatory recognised at fair value net of any directly attributable and liquidity, model risk and other economic factors. uncertainty, an inadequate electricity price path, cost transaction costs. Thereafter, held-for-trading financial containment efforts and our funding plan. liabilities are recognised at fair value through profit Post-employment medical benefits or loss; those financial liabilities that are not held for We recognise a liability for post-employment medical Financial results of operations trading are measured at amortised cost using the benefits to qualifying retirees, for both in-service and The group achieved a net profit after tax of effective interest rate method. retired members, based on an actuarial valuation R0.9 billion for the year (March 2016: R5.2 billion, performed annually, using the projected unit credit restated), and EBITDA of R37.5 billion (March 2016: Embedded derivatives method. The post-employment medical benefits plan R32.8 billion, restated). The electricity EBITDA An embedded derivative is an element of a combined is unfunded. margin has improved to 21.44% (March 2016: 20.29%, instrument that includes a non-derivative host HIGHLIGHTS restated), due to the 9.4% average electricity price contract, with the effect that some of the cash flows Occasional and service leave increase, growth in export sales volumes, and of the combined instrument vary in a way similar A liability is recognised for occasional and service • Further improved EBITDA to R37.5 billion containing primary energy costs. to those of a standalone derivative. Embedded leave due to employees, based on an actuarial • Achieved BPP savings of R20.2 billion derivatives are disclosed separately from hedging valuation performed annually. • Secured our funding requirement for the Refer to the consolidated annual financial statements available online, instruments. Embedded derivatives that are not year despite a challenging environment which detail the financial performance of the group and company separated are effectively accounted for as part of the Provisions for decommissioning, mine closure hybrid instrument. and rehabilitation Provision is made for the estimated decommissioning PROGRESS Financial review Provisions cost of nuclear and other generating plant, as well 16 We recognise a provision when we have a present as the management of spent nuclear fuel assemblies • Export sales volumes increased by 12.1% to legal or constructive obligation as a result of a past and radioactive waste. Provision is also made for the 15 093GWh 14 event, when an outflow of resources is probable and estimated mine-related closure, pollution control and • Expenditure on OCGTs reduced drastically the amount can be reliably estimated. rehabilitation costs at the end of the life of certain coal due to improved system capacity, leading to 12 mines, where a constructive and contractual obligation an 8.5% decline in own generation costs Significant judgements and estimates exists to pay coal suppliers. • Appeal against the Borbet case judgment 10 We make judgements, estimates and assumptions was upheld in favour of NERSA and Eskom concerning the future. Due to their nature, the Provision for coal-related obligations 8 resulting accounting estimates seldom equal the We provide for coal-related obligations which arise actual results. Estimates and judgements are based out of contractual obligations as a result of delays CHALLENGES on historical experience and other factors, including in commissioning of the related power stations, 6 expectations of future events that are believed to be which are determined by taking into account the • Sales volumes in key customer segments reasonable under the circumstances, and are evaluated anticipated commissioning dates, future coal prices, continue to remain stagnant or decline 4 continually. Revisions to accounting estimates are coal utilisation and coal stockpiles. • IPP expenditure makes up 24% of primary energy costs, although IPPs contribute only recognised in the period in which they are revised and 5% of electricity generated 2 the future periods they affect. • Credit ratings downgrades could negatively impact sources and cost of funding 0 The items that follow are those that have a significant • Strengthening Eskom’s balance sheet given 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 risk of causing a material adjustment to the carrying the growing debt service cost, coupled -2 amounts of assets and liabilities within the next with an electricity price which is not cost- financial year. reflective Return on assets (ROA), % Critical accounting estimates and assumptions are set out in detail in note 4 in the consolidated annual financial statements LOWLIGHTS Normalised ROA – historical valuation method Normalised ROA – replacement valuation method Nominal WACC (pre-tax) • Arrear municipal debt escalated significantly Real WACC (pre-tax) over the past year • As a result of the judgment in the Borbet case, NERSA granted a price increase of only 2.2% for 2017/18 82 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 83 Financial sustainability continued Target Target Target Actual Actual Actual Target Operating costs Total coal costs (including environmental levy) Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? Operating costs largely contained showed a 5.4% increase to R58.5 billion (March 2016: R55.5 billion), with production from coal-fired stations Company 160 remaining relatively stable. We have applied the least- Electricity revenue per kWh, c/kWh 128.00 84.76 85.94 83.60 76.24 67.91 cost merit order dispatch of stations, with increased Electricity operating costs, R/MWh 838.77 710.75 725.71 677.91 635.01 603.33 140 burn at cheaper stations such as Lethabo and Duvha. Operating cost per employee, R million 5.40 3.70 3.64 3.49 3.21 3.16 per full-time employee SC Due to the improved availability of the coal fleet, BPP savings, R million SC n/a 18 929 16 992 20 206 17 450 8 696 120 evidenced by the improvement of EAF, coupled with Group more energy being supplied by IPPs, usage of OCGTs 100 was kept to a minimum, with only 29GWh being EBITDA, R million 107 167 30 942 30 359 37 532 32 811 24 186 generated during the year at a cost of R340 million Electricity EBITDA margin, % 35.84 17.22 16.92 21.44 20.29 16.54 (March 2016: R8.7 billion spent producing 3 936GWh). Working capital, ratio 0.93 0.95 0.65 0.85 0.83 0.81 80 The current year cost includes diesel storage and Free funds from operations (FFO), 116 671 38 493 37 979 47 571 39 443 36 179 demurrage charges of R280 million, required due to R million2 FFO after interest paid, R million 69 794 8 292 10 487 21 151 17 928 20 564 60 the low utilisation of the OCGT units. 1. Prior year figures have been restated for the impact of the prior year error. Expenditure on IPPs amounted to R19.8 billion 2. Free funds from operations are calculated before accounting for interest paid for shareholder compact ratios. 40 for the year, adding an additional 11 529GWh to the energy mix (March 2016: R15.1 billion and 9 033GWh). An amount of R2 billion has been 50 25 Sales and revenue 20 deducted from IPP expenditure, relating to the Electricity revenue increased by 8.3% IFRIC 4 charge on the Avon and Dedisa gas peakers, Revenue for the group was R177.1 billion (March 2016: which are treated as arrangements containing a 0 20 R164.2 billion, restated). Electricity revenue of 2013/14 2014/15 2015/16 2016/17 2016/17 lease (March 2016: R340 million). The average 40 target R175.1 billion (March 2016: R161.7 billion) increased cost (before the IFRIC 4 adjustment) increased by R13.4 billion year-on-year, which translates to an to 188c/kWh (March 2016: 171c/kWh), as more 15 overall increase of 8.3% against the prior year, lower Operating expenses, R billion energy proportionately was procured from RE-IPPs 30 than the 9.4% standard tariff increase granted, due at a higher average cost than other IPPs. The capacity to lower volumes than anticipated in the MYPD 3 Primary energy costs Depreciation and amortisation charge paid for the gas peakers also increases the Financial review 10 application. However, when considering the revenue Employee benefit expense Other operating expenses average cost. per kWh sold of 83.60c/kWh, the year-on-year 20 increase is 9.7%, with export sales at a higher rate A comparison of the primary energy unit cost of the Primary energy 5 than anticipated. various generation categories is shown below: Primary energy cost (including coal, water and The application of the IAS 18 principle of not liquid fuels) decreased marginally to R82.8 billion Unit cost, R/MWh 2016/17 2015/16 10 0 recognising revenue if it is not deemed collectible (March 2016: R84.7 billion). Our own generation costs (including the environmental levy) declined Coal 293 279 at the date of sale resulted in external revenue and Nuclear 85 112 debtors of R3.2 billion not being recognised during by 8.5% to R60.1 billion (March 2016: R65.7 billion), OCGTs 2 072 2 243 0 -5 the year, and R5.3 billion cumulatively (March 2016: largely due to significantly lower OCGT usage. 2013/14 2014/15 2015/16 2016/17 2016/17 IPPs 1 714 1 672 target R1.5 billion and R2.1 billion respectively). International purchases 361 377 Electricity sales of 214 121GWh for the year Analysis of profitability (March 2016: 214 487GWh) were 0.2% lower than last year. Industrial customers recorded a decline of Free funds from operations, R billion Electricity EBITDA margin, % 3.7%, which was offset by an increase of 12.1% in EBITDA, R billion Net profit after tax margin, % export sales. This was driven by higher demand due to the drought in the SADC region, and was enabled by the surplus capacity available. We have initiated a strategy to address the decline in sales volumes, focusing on both retention of sales to existing customers, as well as the stimulation of sales growth, while aligning to an electricity price path that supports economic growth. It addresses cross-border sales, local demand stimulation, corporate development and unregulated revenues. Our Treasury Department has its own dealing room 84 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 85 Financial sustainability continued Other operating costs Changes in the fair value of embedded derivatives Levelised cost of electricity (LCOE) The number of employees in the group (including continued to impact the group income statement. Different types of power plants have different characteristics – like the costs relating to initial construction, fixed-term contractors) decreased to 47 658 The net impact for the year was a fair value gain of fuel, operating and maintenance, environmental matters, financing and decommissioning, as well as expected (March 2016: 47 978). Net employee benefit costs R1.6 billion (March 2016: R1 billion), as a result of useful life and annual electricity production – making cost comparison between technologies difficult. for the year amounted to R33.2 billion (March 2016: exchange rate movements, changes in aluminium Levelised cost is an internationally acceptable methodology which expresses the total cost of building and R29.3 billion), due to higher overtime and wage prices and the unwinding of volumes and interest. operating a generating plant over its estimated useful life, as a cost per kWh of production. It is calculated as increases. Furthermore, we raised a provision of R0.5 billion to levelise income differentials. Net finance cost the total life-cycle cost based on assumed utilisation (discounted to present value) divided by total assumed life- Gross finance income for the year was R5.2 billion for cycle production, and represents a break-even price per unit of production that an electricity supplier would Net impairments recognised amounted to R1.7 billion the group (March 2016: R3.4 billion). Gross finance require in order to justify an investment in a particular energy project. (March 2016: R1.2 billion), largely due to the cost for the group was R37.8 billion (March 2016: LCOE equates to the total real cost per unit of production, making it possible to compare different technologies. uncertainty of collecting amounts due from debtors, R30.8 billion). Borrowing costs capitalised to In theory, the long-run marginal cost (LRMC) of a specific technology is represented by the LCOE of an as well as impairment of the Majuba underground coal property, plant and equipment amounted to incremental unit of generating capacity that is needed to meet the next unit of incremental electricity demand, gasification plant.The cumulative impairment provision R18.2 billion (March 2016: R19.4 billion), and the whereas short-run marginal cost (SRMC) applies when surplus capacity is available, and only variable costs are raised at year end for arrear customer debt (excluding unwinding of interest included in gross finance cost required to increase production. interest) was R8.7 billion for all electricity debtors amounted to R5.6 billion (March 2016: R4 billion). (March 2016: R7.8 billion). Net finance cost for the group amounted to The estimated life-cycle production takes into account the type of plant, capacity, availability, technical R14.4 billion (March 2016: R7.9 billion). characteristics (e.g. dispatchability and flexibility), variable cost (which largely determines its position in the Maintenance expenditure remains a large contributor system merit order), system load profile, etc. All of these combine to result in an expected load factor and to operating expenditure. The group’s net repairs and Taxation thus an expected annual production volume. Life-cycle costs and revenues are discounted at a specific rate, maintenance for the year (after capitalisation, but The effective tax rate for the year was 23% depending on cost of capital and the risk profile of the specific technology. before group eliminations) amounted to R14.1 billion (March 2016: 34%, restated), due to an increase in (March 2016: R13.2 billion). Planned maintenance non-taxable income. In order to ensure like-for-like comparison, international benchmarks are adjusted to a common base. The exceeded target, while unplanned maintenance has benchmarks are compared to the Eskom LCOE below. decreased due to fewer breakdowns. More short- Applications submitted to NERSA term maintenance was also performed. Refer to the information block on page 10 under “Our impact USD/MWh (2017 values) Pulverised coal without FGD Pulverised coal with FGD on the capitals” for a discussion of the reasons behind the price Lazard 65 – 150 65 – 150 Other operating expenses, including maintenance, increase of only 2.2% for the 2017/18 financial year Electric Power Research Institute (EPRI) 71 – 78 86 – 95 amounted to R23.6 billion (March 2016: R18.7 billion). International Energy Agency 76 – 107 76 – 107 The increase is largely due to a change in the discount We submitted the 2014/15 and 2015/16 RCA Financial review Medupi (excluding FGD) 53 – 55 n/a rate applied to the decommissioning provisions. applications of R19.2 billion and R23.6 billion Kusile (including FGD) n/a 76 – 77 Depreciation and amortisation increased to respectively during May and July 2016. As both RCA R20.3 billion (March 2016: R16.6 billion, restated), submissions exceeded the 10% threshold of allowed The graphs set out the breakdown of primary energy costs, with the contribution to energy production in brackets. due to more capital projects being transferred to revenue in their respective years, NERSA is required commercial operation, such as the four units at Ingula. to consult on both RCAs before making a decision. 194 248 Progress on the Business Productivity NERSA and Eskom were granted permission to (2%) (1%) 8 086 8 121 Programme appeal the High Court decision, which was heard by BPP was introduced to close the revenue gap the Supreme Court of Appeal (SCA) on 4 May 2017. created by the MYPD 3 revenue determination. The SCA judgment upheld the appeal in favour of 15 106 Although DTC was launched as a continuation of NERSA and Eskom. We await feedback from NERSA 19 757 (4%) BPP to identify additional cost savings, compliance on the way forward with the RCAs for 2014/15 and (5%) with the BPP targets is one of the conditions of the 2015/16. In all likelihood, any RCAs granted would 2015/16 Government support package, and will remain in only benefit us from the 2019/20 financial year, due to 2016/17 effect until 31 March 2018. the consultation process required. 50 975 47 985 (84%) (84%) 3 660 For the year under review, savings of R20.2 billion Given the current uncertainty, NERSA supported (4%) 2 681 were achieved (March 2016: R17.5 billion), exceeding our request to submit a one-year application for (3%) 8 690 the target of R17 billion, primarily as a result of 2018/19. This was submitted for consultation to 340 (2%) lower coal prices and efficiencies in maintenance. National Treasury and SALGA on 19 April 2017. (0%) 727 918 The formal application for a 19.9% increase was (6%) (5%) Inception-to-date savings amount to R48.7 billion submitted to NERSA on 9 June 2017, with the Primary energy cost breakdown, R million against a target of R43 billion. announcement of the final approved tariff for Primary energy cost breakdown, R million (% of energy mix) (% of energy mix) Net fair value loss on financial instruments 2018/19 envisaged by December 2017. Coal IPPs and embedded derivatives Coal IPPs Nuclear fuel Environmental levy The net fair value loss for the group on financial Nuclear fuel Environmental levy OGCTs Other OGCTs Other instruments, excluding embedded derivatives, was Electricity imports Electricity imports R3.3 billion (March 2016: R1.5 billion), and arose from exchange rate movements and fair value adjustments, as well as premium and volume variances on forward exchange contracts due to the ongoing hedging of interest and capital repayments on foreign borrowings. 86 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 87 Financial sustainability continued Credit ratings and solvency Electricity regulation in South Africa and its impact on financial sustainability Solvency ratios NERSA determines our revenues through the MYPD regulatory methodology and broad stakeholder consultation. The MYPD 3 methodology contains a risk-management mechanism – the RCA – that allows for an annual revenue Target Target Target Actual Actual Actual Target Measure and unit 2021/22 2017/18 2016/17 2016/17 2015/16 2014/15 met? adjustment based on actual revenue received and costs incurred by Eskom, as well as other assumptions. The mechanism includes thresholds – if the RCA balance is greater than 10% of the allowed revenue, public consultation Group is required. NERSA is responsible for considering the needs of the consumer, while also ensuring Eskom’s financial Free funds from operations as % of sustainability. 19.35 8.08 8.48 11.69 10.98 11.00 gross debt, % Free funds from operations as % of Due to the entrance of IPPs in recent years, investors are putting more pressure on utilities to uphold the total capex, % 205.58 61.87 55.86 75.11 66.23 65.66 consistency, stability and application of regulatory frameworks to create stability, credibility and confidence in the Cash interest cover, ratio 2.57 1.16 1.47 1.82 1.83 1.88 overall regulatory regime. Credit rating agencies also place great importance on the regulatory framework within Debt service cover, ratio 1.12 0.64 0.90 1.37 1.14 0.91 which we operate. Gross debt/EBITDA, ratio 5.63 15.39 14.75 10.84 10.95 13.60 Debt/equity (including long-term For example, 50% of Moody’s credit rating assessment is weighted towards an assessment of the regulatory 2.91 2.48 2.30 2.11 1.65 2.50 provisions), ratio framework and environment. Part of the credit risk assessment considers the South African regulatory system, the Gearing, % 74 71 70 68 62 71 soundness and predictability of the framework and whether we can reasonably expect to recover our prudent and efficient costs and earn a reasonable risk-adjusted return on capital through NERSA-approved revenues. 1. Prior year figures have been restated for the impact of the prior year error. 2. Cash interest cover is calculated as net cash from operating activities divided by net interest paid. It provides a view of our ability to satisfy the The downgrade by Standard & Poor’s (S&P) in December 2016 reflected the “assessment of a weak regulatory interest burden on our borrowings by utilising cash generated from operating activities. framework [which] has been subject to negative intervention aimed at protecting consumers, which has hurt Eskom’s credit quality”, and their view that “the company’s credit metrics will remain weak over the medium term [as] a result of continued delays in implementing tariffs that reflect costs”. Furthermore, S&P noted that we are 15 3 Most of the key ratios have performed better than facing increased financial pressures as a result of the court case against NERSA, which overturned the 2013/14 target and prior year due to our improved financial RCA award. performance and strong cash flows from operations, with the exception of the debt/equity ratio, which They are concerned that our capital structure and free cash flow will remain at unsustainable levels, even if our 12 deteriorated due to additional funding obtained. liquidity position and operating performance improve over the short term. Our dependence on Government However, credit ratings remain below the level guarantees was also cited as a reason for the downgrade in light of our standalone credit profile, which reflects 2 required to achieve investment-grade status. a greater-than-50% probability of default on our debt. 9 During the year, S&P downgraded our foreign Financial review currency credit rating from BB+ to BB, with a negative outlook following potential risks to Liquidity Government support. Their rating action on South Eskom deems it prudent to maintain a liquidity buffer Cash flows used in investing activities were 6 Africa in December 2016 also led to a downgrade of covering an average of three months’ organisational R62.3 billion for the year (March 2016: R58.6 billion) 1 our long-term local currency credit rating from BB cash flow requirements, which we have exceeded, at for the group. Capital expenditure cash flows on to BB- with a negative outlook. S&P believed that the around 135 days at year end. property, plant and equipment, intangible assets downgrade of the Sovereign signalled a weakening of and future fuel included in this line item, exclusive 3 Cash and cash equivalents decreased to R20.4 billion Government’s ability to provide support to Eskom of capitalised borrowing costs, amounted to at year end (March 2016: R28.5 billion), largely due if needed. R57.9 billion (March 2016: R55.9 billion), mainly due to increased capex spending coupled with increased to expenditure on the new build programme and Fitch revised its outlook on Eskom from stable to interest payments. Liquid assets, which include Generation outages. 0 0 2013/14 2014/15 2015/16 2016/17 2016/17 negative and affirmed its long-term local-currency investment in securities, decreased to R32.5 billion target issuer default rating at BBB-. Moody’s confirmed (March 2016: R38.7 billion). For detail of capital expenditure incurred, refer to the table on Eskom’s Ba1 senior unsecured and Ba1 senior page 54 Solvency ratios unsecured medium-term notes’ ratings, reflecting The group’s net cash inflow from operating activities for the year was R45.8 billion (March 2016: our ongoing access to funding supported by Net cash inflows from financing activities for the Government’s guarantee framework agreement, and R37.2 billion). The working capital ratio remained FFO as % of gross debt Debt/equity ratio year were R7.9 billion (March 2016: R40.9 billion) Cash interest cover the stabilisation of our operational performance. stable at 0.85 (March 2016: 0.83, restated), and the Gross debt/EBITDA Debt service cover for the group. The prior year amount included the cash interest cover ratio at 1.82 (March 2016: 1.83). equity injection of R23 billion. Debt securities and borrowings raised, excluding commercial paper, amounted to R51 billion (March 2016: R41.1 billion), Summary of Eskom’s credit ratings at 31 March 2017 while interest paid amounted to R28.8 billion Rating Standard & Poor’s Moody’s Fitch: local currency (March 2016: R22.8 billion). We repaid debt of R7 billion, excluding commercial paper (March 2016: Foreign currency BB- Ba1 n/a R11.1 billion). Local currency BB- Ba1 BBB- Standalone ccc+ b3 B– Outlook Negative Negative Negative Last rating action Downgrade Affirmed Affirmed Last action date 8 December 2016 5 December 2016 8 December 2016 88 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 89 Financial sustainability continued The Board has approved a borrowing programme We are confident that we will successfully Since year end, S&P and Fitch downgraded our long-term foreign and local currency ratings to B+ and BB+ of R338 billion for the period 1 April 2017 to execute our funding plan over the next five years, respectively, following the Sovereign downgrades, and citing political and institutional uncertainty. Moody’s also 31 March 2022, which relates to the funding supported by the available Government guarantees. downgraded our credit ratings with a negative outlook, following similar action on the Sovereign. The underlying of Eskom Holdings SOC Ltd and excludes our A substantial amount of funding is available to reasons provided for the ratings actions on Eskom is that the support from Government may not be timeously subsidiaries. Our future borrowing programme us through various sources, thus enabling us to provided, given the Sovereign’s weakened credit position, underpinned by our strategic importance as the country’s prioritises unguaranteed funding, in order to enable adequately mitigate liquidity risk. dominant electricity supplier. us to release R105 billion in Government guarantees. Our debt repayment profile is relatively pressured After the recent changes in credit ratings the summary is as follows: over both the short and long term, as maturities Annual funding requirement R billion extend from 2017 to 2043, with interest payments Rating Standard & Poor’s Moody’s Fitch: local currency 2017/18 71.7 of approximately R213 billion and debt repayments Foreign currency B+ Ba2 n/a 2018/19 69.8 of R200 billion over the next five years alone. Debt Local currency B+ Ba2 BB+ 2019/20 69.3 repayment peaks in 2020/21 with the redemption Standalone ccc+ b3 B– 2020/21 64.2 of the outstanding USD1.75 billion international 2021/22 62.7 issuance. Our funding strategy will prioritise longer Outlook Negative Negative Stable Total 337.7 term funding to support short-term debt maturities Last rating action Downgrade Downgrade Downgrade and alleviate repayment risk. Last action date 6 April 2017 13 June 2017 11 April 2017 The anticipated outflows of capital and interest payments on our debt book are shown below. Government support remains critical to stabilise investor sentiment is key given our need to access 60 credit ratings. The recent downgrades may limit debt markets to fund our negative free cash flows sources of funding, or lead to requests for guarantees and refinance debt maturities. on previously unsecured debt. The cost of funding is 50 also likely to increase. We continue to maintain a conservative debt portfolio that was not severely impacted by 40 Funding activities previous ratings downgrades. Apart from marginal Eskom faces rising funding challenges in the context pricing adjustments on two facilities and potential of an adverse regulatory framework and evolving provision of Government guarantees, we have 30 political environment. These challenges arise at a not experienced any prepayment requirements. Funding costs have gradually increased and include Financial review time when there are early signs that institutional 20 investors could display increased risk aversion in a blend of fixed and floating rates. Given that fixed funding state-owned entities. Whilst there has finance costs provide better hedging of interest rate exposures, 76% of finance costs are currently fixed. 10 been no evidence so far of Eskom being impacted, Progress at 31 March 2017 on the execution of the 2016/17 and 2017/18 borrowing programmes 0 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2016/17 2017/18 Committed Drawdowns Committed Anticipated capital and interest cashflows (including swaps) of the strategic and trading portfolio Potential sources, R billion Source to date1 to date2 Source to date1 at 31 March 2017, R billion New domestic bond private placement 10.2 10.2 10.2 – – Capital Interest Domestic bonds 1.4 1.7 1.7 8.0 – International bonds and loans – – – 7.0 – Commercial paper and short-term notes 6.0 7.0 7.0 7.5 – Future focus areas Our impact on the capitals Existing and new DFIs 30.3 30.0 30.0 39.5 27.4 • The drive to contain operating costs will be Our financial capital is both positively and negatively FC Existing and new ECAs 8.4 5.2 5.2 7.2 2.1 Swap restructuring 1.8 3.3 3.2 2.5 2.5 accelerated, with the emphasis on primary energy affected by operations. Revenue and income increase costs, employee benefit costs, maintenance and financial capital, while it is decreased by expenditure, Total 58.1 57.4 57.3 71.7 32.0 third-party spend. This will be done without whether opex or capex. Furthermore, debt funding 1. Funding raised or signed facilities with milestone drawdowns. negatively affecting operating performance increases financial capital, but debt service charges, 2. Period 1 April 2016 to 31 March 2017. • Digital and advanced analytics opportunities will be both capital and interest, decrease financial capital. explored to drive cost savings • Bad debt will be reduced by working with indebted The impact on the other capitals has been discussed We reduced our funding requirement for the year In order to transact in international markets, we under each of the preceding sections. municipalities to improve collection under review from an original target of R68.8 billion are required to remain within a prescribed foreign • Capital optimisation and scrubbing will drive a to R58.1 billion due to savings realised by the borrowing limit set by National Treasury, which reduction in the debt requirement business. Of this, we secured R57.4 billion, of which amounted to R282 billion for the year under review. • Raise funding to match the organisation’s annual R57.3 billion had been drawn down at year end. We maintained foreign borrowings well under that limit. capex spend For the coming financial year, we have already secured The Government guarantee framework agreement funding of R32 billion against a target of R71.7 billion. has been extended from 31 March 2017 to We also had access to committed bank facilities of 31 March 2023. At year end, we have utilised R6.25 billion at year end. We remain confident of R254 billion in Government guarantees, with a securing the balance during the coming year. further R84 billion awaiting approval or having been earmarked for funding under negotiation. 90 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 91 Our governance Governance and ethics Legislation and regulations Ethical leadership forms the foundation of effective We are subject to numerous laws and regulations 93 Governance and ethics which govern our operations, including conditions corporate governance. Integrating sustainability 94 Board of Directors and committees relating to tariffs, expansion activities, environmental concerns with decision-making in an effective manner 96 Executive Management Committee is of utmost importance to Eskom. compliance, as well as regulatory and licence 98 Executive remuneration and benefits conditions, such as water usage and atmospheric Governance framework emissions. Our licensing conditions place strict limits As a state-owned company, our purpose is to deliver on plant emissions to reduce the country’s current on the strategic intent as set out by our shareholder. and future environmental footprint. We adhere to the statutory responsibilities set out in the Companies Act, 2008 and the Public Finance Legislation that influences our governance includes Management Act, 1999. the Electricity Regulation Act, 2006; Companies Act, 2008; Public Finance Management Act (PFMA), Executive authority over the company is vested in 1999; National Environmental Management Act, the Minister of Public Enterprises, the Honourable 1998; National Water Act, 1998; Preferential Ms Lynne Brown, MP. The Board of Directors (the Procurement Policy Framework Act (PPPFA), 2000; Board) guides the group’s strategic direction set Promotion of Access to Information Act (PAIA), out in our Corporate Plan, and monitors Exco’s 2000; Promotion of Administrative Justice Act (PAJA), progress in executing the strategy. 2000; Occupational Health and Safety Act, 1993; and One of the essential components of our governance Employment Equity Act, 1998. The King Code on framework is the clarity of roles between the Corporate Governance in South Africa, the Protocol shareholder, the Board and the management of Eskom, on Corporate Governance in the Public Sector and as set out in the Strategic Intent Statement and our various international guidelines direct us regarding shareholder compact with DPE. Our Memorandum best practice in governance and reporting. of Incorporation regulates the company and our relationship with our shareholder. Our declaration in terms of section 32 of PAIA is available as a fact sheet on page 130. Comprehensive disclosure in the integrated report is restricted by the nature, volume and complexity of PAIA The following diagram depicts the elements which requests, together with the percentage of refusals contribute towards our governance framework. King IV application We welcome the King IV TM Report of Corporate Governance for South Africa, 2016 (King IV) with its 7 1 enhanced principles for good corporate governance. Prior to its launch in November 2016, we focused Relevant Strategic Intent on the application of King III. While this will enable policies and Statement procedures us to transition smoothly to King IV, the process of reviewing our application of the current principles and practices is ongoing and will be refined in the 6 Codes Shareholder 2 year ahead. During this transitional period, we have of good Governance compact governance completed a concluding report on King III and an framework initial report on King IV. Our governance Relevant The full reports on Eskom’s application of King III and King IV are legislation Corporate Plan available on request 5 Memorandum 3 of We utilise the web-based Governance Assessment Incorporation Instrument of the Institute of Directors of Southern 4 Africa to assess our governance profile. Ethics in Eskom The Board and Exco recognise the need to integrate The materiality framework sets out the requirements strategy, governance and sustainability. As a for those matters which require approval in terms signatory to the United Nations Global Compact of the PFMA and, together with our Delegation of LEAD initiative, which includes a clause related to Authority Framework, guides the referral of matters anti-corruption behaviour, as well as to the World from executive-level committees to Board and also to Economic Forum’s Partnership Against Corruption DPE and National Treasury, where applicable. initiative, we strive to embed these ethical principles in our everyday activities. 92 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 93 Our governance continued Values Governance reviews The following non-executive Board members resigned the outcome of that assessment was submitted to Our values underpin our vision, and guide how we do The Board has embarked on a comprehensive during the year: the shareholder. An independent Board evaluation, business. review of the various reports and matters pertaining • Mr Romeo Khumalo, effective 12 April 2016 which covers the 2016/17 financial year, is under way. to perceived governance issues, including the State • Ms Marriam Cassim, effective 14 April 2016 of Capture report by the Public Protector, the PwC • Ms Nazia Carrim, effective 30 June 2016 Board committees report, the Dentons report as well as issues raised • Ms Viroshini Naidoo, effective 30 June 2016 The effectiveness of the Board is enhanced by by National Treasury and the Auditor-General’s • Mr Mark Pamensky, effective 25 November 2016 subcommittees to which it delegates authority without office. Concerns broadly relate to procurement, diluting its own accountability. The Board Recovery contract management and governance. In the Subsequent to year end, Ms Venete Klein resigned and Build Programme Committee was dissolved on interest of good governance, management has and as a director on 12 May 2017. Dr Baldwin Ngubane 30 June 2016. The Board appoints members to the will continue to implement remedial measures resigned on 12 June 2017, after which Mr Zethembe various committees, with due consideration of the to improve the control environment, under the Khoza was appointed as interim Chairman. necessary skills and experience required. oversight of ARC. Group Company Secretary Appointments to the Audit and Risk Committee Management recently initiated a project to assess the The Group Company Secretary is an officer with a are made by the shareholder in terms of our status of implementation of identified weaknesses and central role in the governance and administration of Memorandum of Incorporation. to establish, where necessary, additional measures to the organisation’s affairs and is key to the efficiency and effectiveness of the Board, providing advice and The Audit and Risk Committee and Social, Ethics and improve the relevant controls in a sustainable manner. Sustainability Committee are statutory committees as support to directors. prescribed by the Companies Act, 2008. More information on the governance matters is available in the annual financial statements. Refer to the directors’ report and Ms Suzanne Daniels was appointed by the Board on 1 October 2015. With over 20 years’ experience in All Board committees are chaired by an independent note 52 on information required in terms of the PFMA the legal industry, she is suitably qualified to serve the non-executive director and consist of a majority of Board and its committees in this role. independent non-executive directors. Committees Board of Directors and committees Zero Harm Sinobuntu (Caring) exercise their authority in accordance with Board- Governance of the group and the responsibility for Director induction and training approved terms of reference, which define their driving good corporate citizenship is vested in a unitary A director onboarding plan is in place, comprising composition, mandate, roles and responsibilities. board, supported by several Board committees and Integrity Customer satisfaction a formal induction and site visits for all directors. These terms of reference are aligned with the Group Company Secretary. The Board provides To ensure that all directors remain informed about the Delegation of Authority Policy, legislative strategic direction, while the Group Chief Executive, pertinent matters, continuous training and updates requirements and best practice, and are reviewed assisted by Exco and its subcommittees, is accountable Innovation Excellence are provided on a regular basis. Time is set aside at each year. for implementing our strategy. each scheduled Board meeting to address the training needs of the Board or individual directors, and to brief Deliberations of the committees do not reduce the Board constitution and appointments directors on any new legislation or regulations. individual and collective responsibilities of directors In accordance with our Memorandum of Incorporation, regarding their fiduciary duties and responsibilities. Code of Ethics the Board must consist of a minimum of three and a Board evaluation Directors are required to exercise due care and Our approach to achieving an ethical culture is set maximum of 15 directors, the majority of which must A formal Board evaluation was conducted by an judgement in accordance with their statutory out in our Code of Ethics, titled “The Way”, which be non-executive directors. At the date of approval, external service provider in May 2016. Feedback on obligations. provides guidance on the behaviour expected of each there are four non-executive directors, including the and every director and employee. Policies governing interim Chairman, and one executive director. the declaration of interests and managing any conflicts Non-executive directors are appointed to the Board ARC Audit and Risk Committee 5 meetings held during the year of interest assist directors and employees to avoid by the shareholder for a period of three years, situations where they have, or may be perceived to Purpose Oversight of financial reporting and disclosure, risk management and internal control systems, as reviewable annually. The People and Governance well as internal and external audit functions have, a direct or indirect interest that conflicts with Our governance Committee assists the shareholder by identifying the the company’s interests. Members (at year end) Ms C Mabude (interim chairman), Ms VJ Klein, Mr G Leonardi, Dr P Naidoo necessary skills, qualifications and experience required All conflicts of interest declared by directors and by the Board to achieve our objectives. Key activities • Recommended the Board approve the 2016 year end and interim group financial statements and integrated reports members of Exco are raised in meetings and minuted The Board consists of a majority of independent non- • Oversight of close-out of the Dentons report recommendations for the record. Employees are required to perform • Accepted the KPMG controls and governance framework review report and approved the executive directors who possess diverse skills and an annual declaration of interest, or as soon as implementation plan experience in the fields of science, engineering, law, circumstances change. • Monitored financial performance and liquidity; IT governance, risk, security and compliance; finance, economics, accounting and auditing, as well as ethics; nuclear assurance; enterprise risk and resilience; litigation and new legislation; The Board, through the People and Governance business and enterprise risk management. compliance management Committee, ensures that the Ethics Management Investment and Finance Programme is effectively implemented. We maintain Refer to pages 20 and 21 for the profiles and committee IFC Committee 9 meetings held during the year memberships of the Board, including qualifications and active a zero tolerance approach to fraud, corruption and directorships Purpose Investment and financial decision-making other forms of economic crime or dishonest activity. Members (at year end) Ms C Mabude (chairman), Mr ZW Khoza, Ms VJ Klein, Dr P Naidoo Changes in Board composition To encourage whistle-blowing we have a fraud and There were no new appointments to the Board in Key activities • Monitored progress on municipality and Soweto payments, and approved the write-off of corruption hotline on 0800 112 722. The number of bad debt 2016/17. reported incidents has reduced significantly over the • Approved mandates to secure funding, and various capital and refurbishment projects last five years, showing that preventative actions such Mr Brian Molefe resigned as an executive director • Concluded firm power sales agreements with a number of SADC countries as fraud awareness training are starting to deliver effective 31 December 2016. • Approved the dissolution of Eskom Development Foundation NPC, with the activities being results. We also maintain an Ethics Helpline to assist absorbed into Eskom with effect from 1 April 2017 employees with queries around ethical conduct. 94 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 95 Our governance continued People and Governance On 2 May 2017, the Board rescinded their decision approving Mr Molefe’s early retirement and he returned as P&G Committee 7 meetings held during the year Group Chief Executive on 15 May 2017. However, on 2 June 2017, the Board rescinded the subsequent decision and Mr Molefe was asked to step down as Group Chief Executive. Mr Molefe approach the Labour Court on the Purpose Nomination and remuneration of directors and senior executives; human resources strategies and policies; custodian of corporate governance basis that overturning his reappointment was unlawful; the case has been postponed. On 6 June 2017, the High Court ruled that Mr Molefe may not return to work until such time as the Labour Court has ruled. Members (at year end) Ms VJ Klein (chairman), Mr ZW Khoza, Mr G Leonardi, Ms C Mabude, Dr BS Ngubane Key activities • Approved Eskom’s response to the Public Protector’s reports Operating structure • Approved the pay-out of the 2015/16 executive short-term incentive bonus Our operating structure comprises line functions that operate the business, service functions that support • Noted the performance management objectives those operations and strategic functions which develop the organisation. Members of Exco are assigned to take • Reviewed the report on income differentials accountability for each of the areas. • Noted and reviewed reports on industrial relations, employment equity, ethics, and employee engagement survey feedback Social, Ethics and SES Sustainability Committee 4 meetings held during the year Oversight of Eskom’s social and economic development role, good corporate citizenship, as well Purpose as environment, health and public safety programmes Line functions Service functions Strategic functions Members (at year end) Dr P Naidoo (chairman), Mr ZW Khoza, Ms VJ Klein, Mr G Leonardi, Ms C Mabude Generation Group Finance Sustainability and Risk Management Key activities • Reviewed Eskom’s socio-economic development strategy Transmission Human Resources Strategy Support • Approved the revised water management policy, and the air quality improvement plan • Noted and reviewed a number of reports, including occupational health and safety; nuclear Distribution Group Commercial Corporate Affairs oversight; nuclear new build; industrial and employee relations; skills development; Customer Services Group Technology Regulation and Legal stakeholder engagement; environmental management; climate change; operational Group Capital Group IT Security sustainability; and electrification TC Board Tender Committee 13 meetings held during the year Purpose Ensure that the procurement system is equitable, transparent, competitive and cost effective to support commercial decision-making. The committee evaluates tenders over R750 million Exco subcommittees Members (at year end) Mr ZW Khoza (chairman), Ms C Mabude, Dr P Naidoo The following subcommittees assist Exco in the execution of their duties: Key activities • Tenders approved include short-term coal supply agreements; power purchase agreements Subcommittee Purpose/key activities with IPPs and municipal generators; various capital and refurbishment projects; and supply of petrol, diesel and fuel oil to the coal-fired power stations Capital Committee • Investment decisions to support Eskom’s strategy • Approved the procurement strategy for spent fuel storage at Koeberg • Decisions about the commercial process • Consider impact of decisions on the funding plan, equity, key financial and investment ratios Meeting attendance Refer to pages 22 and 23 for the profiles and areas of responsibility Meetings of the Board and its committees are of Exco members, including their appointment dates, qualifications Exco Procurement Committee • Ensure that the procurement system is equitable, transparent, competitive and and directorships, if any cost effective scheduled annually in advance. Special meetings are convened as and when required to address specific Finance Committee • Decisions on financial strategy and budgets Exco held nine meetings during the year. material issues. The Board held 17 scheduled and • Integration of Treasury and business activities breakaway meetings during the year. • Monitor funding pipeline, cash flow position and financial risk management Attendance of Exco meetings is shown in the fact sheet on page 121 Nuclear Management Committee • Management of Eskom’s nuclear objectives (both existing and new build) Attendance of Board and subcommittee meetings is available in the Changes in Exco in 2016/17 • Interface with regulatory bodies and deal with licensing matters fact sheet on page 120 Ms Elsie Pule was appointed Group Executive: Human • Risk management for nuclear operations Our governance Resources, and Mr Sean Maritz was appointed Group Operating Committee • Key operational decisions in Generation, Transmission, Distribution and new build Executive Management Committee Executive: Information Technology, both with effect • Risk evaluation and mitigation approach to technical and operational health Exco, which is established by the Group Chief from 1 June 2016. performance Executive, assists him in executing the strategy set by the Board and exercising executive control in Mr Brian Molefe went on early retirement as Group People Committee • Human resources decisions, issues, processes and procedures managing day-to-day operations. • Talent management and staffing Chief Executive effective 31 December 2016, • Strategic workforce planning after which Mr Matshela Koko, previously The shareholder appoints the Group Chief Executive Group Executive: Generation, was appointed Regulation, Policy and Economics • Review impact of regulatory and economic policies, as well as long-term energy (GCE). The shareholder may request the Board to Committee policy as Interim Group Chief Executive with effect identify, nominate and evaluate potential candidates. • Development of regulatory response strategy and tariff outlook from 1 December 2016. This was followed by However, the shareholder’s appointment of the GCE • Oversight of Eskom’s regulated licences the appointment of Mr Willy Majola as acting binds the company to the exclusion of the Board of • Approach to environmental policies and Eskom’s economic impact Group Executive: Generation with effect from Directors. 1 January 2017. Risk and Sustainability Committee • Consolidation and monitoring of overall business risks and processes The Chief Financial Officer is appointed by the • Monitor operational risk within compliance guidelines Mr Abram Masango, previously Group Executive: • Consider safety, health and environmental compliance Board, subject to approval by the shareholder. Group Capital, was appointed as Group Executive • Reputational risk management Group executives are recommended by the Group in the Office of the Chief Executive. Mr Prish Chief Executive and appointed by the People and Govender was appointed as acting Group Executive: Governance Committee; they are full-time employees Group Capital in his stead, both with effect from of Eskom, subject to our conditions of service. 22 March 2017. 96 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 97 Our governance continued Supplementary information Executive remuneration and benefits Remuneration of Exco members consists of the Our approach to remuneration following: 100 Abbreviations International and local benchmarks are considered • A guaranteed package based on cost-to- 101 Glossary of terms in determining executive remuneration, to ensure company, consisting of a fixed cash portion and 103 Eskom’s energy flow diagram that executive packages are aligned to those offered compulsory benefits, such as life cover and pension. 104 Statistical tables: ten years’ information by companies of similar stature in order to retain This is reviewed annually to remain market-related for technical KPIs and five years for non- key leadership skills. Our executive remuneration • Short-term incentives, which reward the technical KPIs strategy is reviewed to align to the DPE Remuneration achievement of predetermined performance objectives and targets set by the Group Chief 110 Customer information, such as number Guidelines and best practice; the balance between fixed and variable remuneration (short- and long-term Executive, which are linked to the shareholder of customers, electricity sales and incentives) is reviewed annually. compact. It is calculated as a percentage of electricity revenue per customer category pensionable earnings 112 Power station capacities Remuneration structure • Long-term incentives, designed to attract, 114 Power lines and substations in service Our remuneration structure for non-executive retain and reward Exco members for achieving 115 Benchmarking information directors and executives is set out below. organisational objectives set by the shareholder 119 Environmental implications of using or Non-executive directors over a period of three years. It is dependent on the saving electricity Remuneration of non-executive directors is individual remaining in our employment throughout 120 Board and Exco meeting attendance benchmarked against companies of a similar the vesting period, and lapses if employment ceases during the vesting period, other than for permitted 122 Independent sustainability assurance size, and is in line with guidelines issued by DPE. reasons report Remuneration proposals from the People and Governance Committee are submitted to the Board, 126 GRI G4 indicator table A market-benchmarked long-term incentive scheme, which makes recommendations to the shareholder. 130 Compliance with Promotion of Access approved by the shareholder, has been in place since to Information Act Non-executive directors receive a fixed monthly 1 April 2005. 131 Contact details fee and are reimbursed for out-of-pocket expenses A number of performance shares (award incurred in fulfilling their duties. performance shares) were awarded to Exco Executive remuneration members on 1 April 2014, 2015 and 2016. The long- The Group Chief Executive and Chief Financial term incentive vesting rate for shares awarded on Officer have term contracts. Other group executives 1 April 2014 and vesting on 31 March 2017 was have permanent employment contracts based on 49.42% (March 2016: 44.48%). The People and our standard conditions of service. None of the Governance Committee exercised its discretion executives have extended employment contracts or and reduced the vesting rate to 44.42% (March 2016: special termination benefits. No restraints of trade are 34.48%). The cash value of the shares is payable in in place. June 2017 at R1.25 per share, based on the money market rate (March 2016: R1.23). Shares awarded on The employment contracts of executive directors 1 April 2013 were redeemed during the year. and Exco members are subject to a six-month notice period, unless otherwise agreed. Other executives Remuneration of directors and group executives have to serve one month’s notice in terms of our Category, R 000 2016/17 2015/16 standard conditions of service. Non-executive directors 6 439 6 656 The Group Chief Executive’s remuneration is Executive directors 16 109 29 042 approved by the Board. The People and Governance Other Exco members 38 966 39 628 Committee approves the remuneration of the Chief Total remuneration 61 514 75 326 Financial Officer and group executives, in accordance with the shareholder-approved framework. Refer to note 50 in the annual financial statements for detailed Executive remuneration consists of a guaranteed remuneration information, which includes disclosure of the package augmented by short- and long-term incentives, remuneration of the three highest paid individuals in Eskom, as required by King III and is based on organisational as well as individual performance, and takes account of executives’ skills and experience. 98 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 99 Abbreviations Glossary of terms ARC Audit and Risk Committee Mℓ Megalitre = 1 million litres Base-load plant Largely coal-fired and nuclear power stations, designed to operate continuously B-BBEE Broad-based black economic empowerment mSv Millisievert Cash interest cover Provides a view of the company’s ability to satisfy the interest burden on its borrowings by COGTA Department of Cooperative Governance and Mt Million tons utilising cash generated from operating activities. It is calculated as net cash from operating Traditional Affairs activities divided by (interest paid on financing activities less interest received from MVA Megavolt-ampere investing and financing activities) CSI Corporate social investment MW Megawatt = 1 million watts Cost of electricity (excluding Electricity-related costs (primary energy costs, employee benefit costs plus impairment CSP Concentrated solar power depreciation) loss and other operating expenses) divided by total electricity sales in GWh multiplied by MWh Megawatt-hour = 1 000kWh DEA Department of Environmental Affairs 1 000 MYPD Multi-year price determination DoE Department of Energy Daily peak Maximum amount of energy demanded by consumers in one day NDP National Development Plan DPE Department of Public Enterprises Debt/equity including long-term Net financial assets and liabilities plus non-current retirement benefit obligations and non- NERSA National Energy Regulator of South Africa provisions current provisions divided by total equity DTC Design-to-Cost strategy NNR National Nuclear Regulator Debt service cover ratio Net cash from operating activities divided by (net interest paid from financing activities plus DWS Department of Water and Sanitation OCGT Open-cycle gas turbine (see glossary) debt securities and borrowings repaid) EAF Energy availability factor (see glossary) OCLF Other capability loss factor Decommission To remove a facility (e.g. reactor) from service and either store it safely or dismantle it EBITDA Earnings before interest, taxation, depreciation, amortisation and fair value adjustments OHS Occupational health and safety Demand side management Planning, implementing and monitoring activities to encourage consumers to use electricity PCLF Planned capability loss factor more efficiently, including both the timing and level of demand EU European Union PAIA Promotion of Access to Information Act, 2000 Electricity EBITDA margin Electricity revenue (excluding electricity revenue not recognised due to uncollectability) as EUF Energy utilisation factor (see glossary) a percentage of EBITDA Exco Executive Management Committee PAJA Promotion of Administrative Justice Act, 2000 Electricity operating costs per kWh Electricity-related costs (primary energy costs, employee benefit costs, depreciation FGD Flue gas desulphurisation PFMA Public Finance Management Act, 1999 and amortisation plus impairment loss and other operating expenses) divided by total PPA Power purchase agreement electricity sales in kWh multiplied by 100 GDP Gross domestic product PV (Solar) photovoltaic Electricity revenue per kWh Electricity revenue (including electricity revenue not recognised due to uncollectability) GE Group executive divided by total kWh sales multiplied by 100 GRI Global Reporting Initiative RCA Regulatory Clearing Account Embedded derivative Financial instrument that causes cash flows that would otherwise be required by modifying GW Gigawatt = 1 000 megawatts RE-IPP Renewable independent power producer a contract according to a specified variable such as currency GWh Gigawatt-hour = 1 000MWh SADC Southern African Development Community Energy availability factor (EAF) Measure of power station availability, taking account of energy losses not under the control IPP Independent power producer (see glossary) SAIDI System average interruption duration index of plant management and internal non-engineering constraints King III King Report of Corporate Governance for South SAIFI System average interruption frequency index Energy efficiency Programmes to reduce energy used by specific end-use devices and systems, typically Africa 2009 SALGA South African Local Government Association without affecting services provided King IV King IV TM Report of Corporate Governance for SAPP Southern African Power Pool Energy utilisation factor (EUF) Ratio of actual electrical energy produced during a period of time divided by the total South Africa 2016 available energy capacity. It is a measure of the degree to which the available energy SESC Social, Ethics and Sustainability Committee capacity of an electricity supply network is utilised. Available energy capacity refers to KPI Key performance indicator the capacity after all unavailable energy (planned and unplanned energy losses) has been TMPS Total measured procurement spend kt Kiloton = 1 000 tons taken into account, and represents the net energy capacity made available to the System UAGS Unplanned automatic grid separations Operator or national grid kV Kilovolt UCLF Unplanned capability loss factor (see glossary) Forced outage Shutdown of a generating unit, transmission line or other facility for emergency reasons kWh Kilowatt-hour = 1 000 watt-hours (see glossary) or a condition in which generating equipment is unavailable for load due to unanticipated USA United States of America kWhSO Kilowatt-hour sent out breakdown LTIR Lost-time injury rate (see glossary) Free basic electricity Amount of electricity deemed sufficient to provide basic electricity services to a poor household (50kWh per month) Free funds from operations Cash generated from operations adjusted for working capital Gross debt Debt securities and borrowings plus finance lease liabilities plus the after-tax effect of provisions and employee benefit obligations Gross debt/EBITDA ratio Gross debt divided by earnings before interest, taxation, depreciation, amortisation and fair value adjustments Independent non-executive director A director who: • Is not a full-time salaried employee of the company or its subsidiary • Is not a shareholder representative • Has not been employed by the company and is not a member of the immediate family of Supplementary information an individual who is, or has been in any of the past three financial years, employed by the company in any executive capacity • Is not a professional advisor to the company • Is not a significant supplier or customer of the company Independent power producer (IPP) Any entity, other than Eskom, that owns or operates, in whole or in part, one or more independent power generation facilities 100 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 101 Glossary of terms Eskom’s energy flow diagram continued Kilowatt-hour (kWh) Basic unit of electric energy equal to one kilowatt of power supplied to or taken from an The energy wheel shows the volume of electricity that flowed from local and international power stations and electric circuit steadily for one hour independent power producers (IPPs) to Eskom’s distribution and export points during the past two years, including the losses incurred in reaching those customers. Load Amount of electric power delivered or required on a system at any specific point Load curtailment Typically larger industrial customers reduce their demand by a specified percentage for All figures in GWh, unless otherwise indicated. the duration of a power system emergency. Due to the nature of their business, these customers require two hours’ notification before they can reduce demand Generation of Available for Total imports 2016/17 2015/16 electricity 2016/17 2015/16 distribution 2016/17 2015/16 Load management Activities to influence the level and shape of demand for electricity so that demand International conforms to the present supply situation, long-term objectives and constraints 7 418 9 703 Generation 220 137 216 043 Generation purchases 231 695 229 012 OCGTs 29 3 936 (including IPPs) Wheeling1 2 910 3 930 Load shedding Scheduled and controlled power cuts that rotate available capacity between all customers International when demand is greater than supply in order to avoid blackouts. Distribution or municipal Own generation 220 166 219 979 7 418 9 703 Total 10 328 13 633 purchases control rooms open breakers and interrupt load according to predefined schedules IPPs 11 529 9 033 Wheeling1 2 910 3 930 Lost-time injury (LTI) A work injury which arises out of and in the course of employment and which renders the Generation Subtotal 242 023 242 645 injured employee or contractor unable to perform his/her regular/normal work on one or 231 695 229 012 (including IPPs) Pumping (4 808) (4 046) more full calendar days or shifts other than the day or shift on which the injury occurred. It includes occupational diseases Pumping (4 808) (4 046) Total 237 215 238 599 Total exports 2016/17 2015/16 Lost-time injury rate (LTIR) Proportional representation of the occurrence of lost-time injuries over 12 months per Total 226 887 224 966 200 000 working hours. It includes occupational diseases International 15 093 13 465 sales2 Maximum demand Highest demand of load within a specified period Wheeling1 2 910 3 930 Off-peak Period of relatively low system demand Total 18 003 17 395 Southern African Open-cycle gas turbine (OCGT) Liquid fuel turbine power station that forms part of peak-load plant and runs on kerosene or diesel. Designed to operate in periods of peak demand Power Pool Outage Period in which a generating unit, transmission line, or other facility is out of service Peak demand Maximum power used in a given period, traditionally between 7:00 and 10:00, as well as External sales 2016/17 2015/16 18:00 to 22:00 in summer and 17:00 to 21:00 in winter Internal use 2016/17 2015/16 Local sales 199 028 201 022 Peaking capacity Generating equipment normally operated only during hours of highest daily, weekly or Demand 2016/17 2015/16 seasonal loads Internal use 480 661 International 15 093 13 465 Generated (20) (71) Total sales 214 121 214 487 sales2 Peak-load plant Gas turbines, hydroelectric or a pumped storage scheme used during periods of peak Technical and demand Total 460 590 21 399 19 895 Total 214 121 214 487 other losses Primary energy Energy in natural resources, e.g. coal, liquid fuels, sunlight, wind, uranium and water Internal use 480 661 Generated (20) (71) Technical and Pumped storage scheme A lower and an upper reservoir with a power station/pumping plant between the two. Wheeling 2 910 3 930 other losses 2016/17 2015/16 During off-peak periods the reversible pumps/turbines use electricity to pump water from Unaccounted (1 675) (303) the lower to the upper reservoir. During periods of peak demand, water runs back into the Distribution 16 293 13 866 lower reservoir through the turbines, generating electricity Total 237 215 238 599 Transmission 5 106 6 029 Reserve margin Difference between net system capability and the system’s maximum load requirements Total 21 399 19 895 (peak load or peak demand) Distribution % 7.55 6.43 Return on assets EBIT divided by the regulated asset base, which is the sum of property, plant and Transmission % 2.22 2.61 equipment, trade and other receivables, inventory and future fuel, less trade and other payables and deferred income Total % 8.85 8.59 System minutes Global benchmark for measuring the severity of interruptions to customers. One system 1. Wheeling refers to the movement of electricity between international customers through our network, without the power being minute is equivalent to the loss of the entire system for one minute at annual peak. A major available to customers on the South African grid. incident is an interruption with a severity ≥ 1 system minute 2. International sales includes exports by Distribution International to Lesotho. The actual volumes were 87GWh for 2016/17 and 89GWh Technical losses Naturally occurring losses that depend on the power systems used for 2015/16. Unit capability factor (UCF) Measure of availability of a generating unit, indicating how well it is operated and maintained Unplanned capability loss factor (UCLF) Energy losses due to outages are considered unplanned when a power station unit has to be taken out of service and it is not scheduled at least four weeks in advance Used nuclear fuel Nuclear fuel irradiated in and permanently removed from a nuclear reactor. Used nuclear fuel is stored on-site in used fuel pools or storage casks Supplementary information Watt The watt is the International System of Units’ (SI) standard unit of power. It specifies the rate at which electrical energy is dissipated (energy per unit of time) Working capital ratio (Inventory plus the current portion of payments made in advance, trade and other receivables and taxation assets) divided by (the current portion of trade and other payables, payments received in advance, provisions, employee benefit obligations and taxation liabilities) 102 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 103 Ten-year technical statistics Measure and unit 2016/17 2015/16 2014/15 2013/14 2012/13 2011/12 2010/11 2009/10 2008/9 2007/8 Customer statistics Arrear debt as % of revenue, % 2.43 1.14 2.17 1.10 0.82 0.53 0.75 0.83 1.54 – Debtors days – municipalities, average debtors days 53.3RA 42.9 47.6 32.7 22.4 – – – – – Debtors days – large power top customers excluding disputes, average 15.3RA 15.5 16.8 14.5 12.3 14.4 15.5 15.4 16.5 – debtors days Debtors days – other large power users (<100 GWh p.a.), average 16.8 RA 16.2 17.0 16.9 18.3 – – – – – debtors days Debtors days – small power users (excluding Soweto), average 48.8 RA 48.2 49.1 50.2 48.2 42.9 45.1 40.5 47.5 – debtors days Eskom KeyCare, index 107.0 104.3RA 108.7 108.7 105.8 105.9 101.2 98.1 101.2 – Top Customer KeyCare, index 108.1 107.2 110.5 110.8 107.5 108.0 – – – – Enhanced MaxiCare 95.8 96.5RA 99.8 92.7 93.2 90.7 89.4 93.0 92.8 89.2 CustomerCare, index 9.8 8.4 8.0 8.3 8.4 8.2 8.1 8.2 8.3 8.3 Sales and revenue Total sales, GWh1 214 121 214 487 216 274 217 903 216 561 224 785 224 446 218 591 214 850 224 366 (Reduction)/growth in GWh sales, % (0.2) (0.8) (0.7) 0.6 (3.7) 0.2 2.7 1.7 (4.2) 2.9 Electricity revenue, R million 175 094 161 688 146 268 136 869 126 663 112 999 90 375 69 834 52 996 43 521 Growth in revenue, % 8.3 10.5 6.9 8.1 12.1 25.0 29.4 31.8 21.8 10.5 Electricity output Power sent out by Eskom stations, GWh (net) 220 166 219 979 226 300 231 129 232 749 237 289 237 430 232 812 228 944 239 109 Coal-fired stations, GWh (net) 200 893 199 888 204 838 209 483 214 807 218 210 220 219 215 940 211 941 222 908 Hydroelectric stations, GWh (net) 579 688 851 1 036 1 077 1 904 1 960 1 274 1 082 751 Pumped storage stations, GWh (net) 3 294 2 919 3 107 2 881 3 006 2 962 2 953 2 742 2 772 2 979 Gas turbine stations, GWh (net) 29 3 936 3 709 3 621 1 904 709 197 49 143 1 153 Wind energy, GWh (net) 345 311 1 2 1 2 2 1 2 1 Nuclear power station, GWh (net) 15 026 12 237 13 794 14 106 11 954 13 502 12 099 12 806 13 004 11 317 IPP purchases, GWh 11 529 9 033 6 022 3 671 3 516 4 107 1 833 – – – Wheeling, GWh2 2 910 3 930 3 623 3 353 2 948 3 099 3 423 3 175 – – Energy imports from SADC countries, GWh2 7 418 9 703 10 731 9 425 7 698 9 939 10 190 10 579 12 189 11 510 Total electricity available (generated by Eskom and purchased), GWh1 242 023 242 645 246 676 247 578 246 911 254 434 252 876 246 566 241 133 250 619 Total consumed by Eskom, GWh3 4 808 4 046 4 114 3 862 4 037 3 982 3 962 3 695 3 816 4 136 Total available for distribution, GWh 237 215 238 599 242 562 243 716 242 874 250 452 248 914 242 871 237 317 246 483 Supply and demand Total Eskom power station capacity – installed, MW 46 407 45 075 44 281 44 189 44 206 44 115 44 145 44 175 44 193 43 037 Total Eskom power station capacity – nominal, MW 44 134 42 810 42 090 41 995 41 919 41 647 41 194 40 870 40 506 38 747 Total IPP power station capacity – nominal, MW 5 027 3 392 2 606 1 677 1 135 1 008 803 – – – Peak demand on integrated Eskom system, MW 34 122 33 345 34 768 34 977 35 525 36 212 36 664 35 850 35 959 36 513 Peak demand on integrated Eskom system, including load reductions and 34 913 34 481 36 170 36 002 36 345 37 065 36 970 35 912 36 227 37 158 non-Eskom generation, MW National rotational load shedding No Yes Yes YesRA NoRA NoRA NoRA NoRA Yes – Demand savings, MW 236.9 214.9 171.5RA 409.6RA 595.0 RA 365.0 RA 354.1 – – – Internal energy efficiency, GWh 6.0 1.7RA 10.4 RA 19.4 RA 28.9 RA 45.0 RA 26.2RA – – – Asset creation Generation capacity installed: first synchronisation, units 2 2RA 1RA – – – – – – – Generation capacity installed and commissioned, MW 1 332 RA 794 RA 100 RA 120 RA 261RA 535RA 315RA 452RA 1 770 1 043 Transmission lines installed, km 585.4 RA 345.8 RA 318.6RA 810.9 RA 787.1RA 631.3RA 443.4 RA 600.3RA 418.3 480.0 Substation capacity installed and commissioned, MVA 2 300 RA 2 435RA 2 090 RA 3 790 RA 3 580 RA 2 525RA 5 940 RA 1 630 RA 1 375 1 355 Total capital expenditure – group (excluding capitalised borrowing 60.0 57.4 53.1RA 59.8 RA 60.1 58.8 47.9 48.7 43.7 24.0 costs), R billion Safety Employee lost-time injury rate (LTIR) – company, index4, 5 0.43 0.29 0.36 0.31RA 0.40 RA 0.41RA 0.47RA 0.54 RA 0.50 0.46 Supplementary information Employee lost-time injury rate (LTIR) – group, index4, 5 0.39 0.30 0.33 0.32 – – – – – – Fatalities (employees and contractors), number 10 17 10 23RA 19 RA 24 RA 25RA 17RA 27 29 Employee fatalities, number 4 4 3 5RA 3RA 13RA 7RA 2RA 6 17 Contractor fatalities, number 6 13 7 18 RA 16RA 11RA 18 RA 15RA 21 12 1. Difference between electricity available for distribution and electricity sold is due to energy losses. 2. Prior to 2009/10, wheeling was combined with the total imported for the Eskom system. 3. Used by Eskom for pumped storage facilities and synchronous condenser mode of operation. 4. The employee LTIR includes occupational diseases. 5. Prior to 2013/14, only company numbers were reported. RA Reasonable assurance provided by the independent assurance provider. Refer to pages 122 to 125 of the integrated report. 104 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 105 Ten-year technical statistics continued Measure and unit 2016/17 2015/16 2014/15 2013/14 2012/13 2011/12 2010/11 2009/10 2008/9 2007/8 Primary energy Coal stock, days 74 58 51 44 RA 46RA 39 RA 41RA 37RA 41 13 Road-to-rail migration (additional tonnage transported on rail), Mt 13.2Q 13.6RA 12.6RA 11.6RA 10.1RA 8.5 7.1 5.1 4.3 4.4 Coal purchased, Mt 120.3 118.7 121.7 122.0 126.4 124.3 126.2 121.8 132.7 119.6 Coal burnt, Mt 113.7 114.8 119.2 122.4 123.0 125.2 124.7 122.7 121.2 125.3 Average calorific value, MJ/kg 20.05 19.57 19.68 19.77 19.76 19.61 19.45 19.22 19.10 18.51 Average ash content, % 28.62 28.19 27.63 28.56 28.69 28.88 29.03 29.56 29.70 29.09 Average sulphur content, % 0.84 1.07 0.80 0.87 0.88 0.79 0.78 0.81 0.83 0.87 Overall thermal efficiency, % 31.2 31.1 31.4 31.3 32.0 31.4 32.6 33.1 33.4 33.4 Diesel and kerosene usage for OCGTs, Mℓ 10.0 1 247.8 1 178.6 1 148.5RA 609.7RA 225.5RA 63.6RA 16.1RA 28.9 345.9 Plant performance Unplanned capability loss factor (UCLF), % 9.90 14.91RA 15.22RA 12.61RA 12.12RA 7.97RA 6.14 RA 5.10 RA 4.38 5.13 Planned capability loss factor (PCLF), % 12.14 RA 12.99 9.91RA 10.50 RA 9.10 9.07 7.98 9.04 9.54 – Energy availability factor (EAF), % 77.30 RA 71.07RA 73.73RA 75.13RA 77.65RA 81.99 RA 84.59 RA 85.21 85.32 84.85 Unit capability factor (UCF), % 78.00 72.10 74.87 76.90 RA 78.80 RA 83.00 RA 85.90 RA 85.90 86.10 86.20 Generation load factor, % 57.9 58.8 61.5 62.8 63.6 65.1 66.4 66.2 67.0 72.3 OCGT load factor trend 0.1 18.6 17.6 19.3RA 10.4 RA 3.9 1.1 0.3 – – Integrated Eskom system load factor (EUF), % 75.0 82.7 83.4 83.6 81.9 79.4 78.5 77.7 78.6 85.2 Network performance Total system minutes lost for events <1 minute, minutes 3.80 RA 2.41RA 2.85RA 3.05RA 3.52RA 4.73RA 2.63RA 4.09 RA 4.21 3.56 Major incidents, number 0 1 2 0 RA 3RA 1RA 0 RA 1RA 3 5 System average interruption frequency index (SAIFI), events 18.9 RA 20.5RA 19.7RA 20.2RA 22.2RA 23.7RA 25.3RA 24.7RA 24.2 33.7 System average interruption duration index (SAIDI), hours 38.9 RA 38.6RA 36.2RA 37.0 RA 41.9 RA 45.8 RA 52.6RA 54.4 RA 51.5 73.7 Total energy losses, % 8.9 8.6 8.8 8.9 9.1 8.7 8.3 8.5 7.9 8.0 Transmission energy losses, % 2.2 2.6 2.5 2.3RA 2.8 RA 3.1RA 3.3RA 3.3 3.1 3.1 Distribution energy losses, % 7.6RA 6.4 6.8 7.1RA 7.1RA 6.3RA 5.7RA 5.9 5.5 5.5 Environmental statistics Emissions Relative particulate emissions, kg/MWh sent out1 0.30 RA 0.36RA 0.37RA 0.35RA 0.35RA 0.31RA 0.33RA 0.39 RA 0.27 0.21 Carbon dioxide (CO2), Mt1 211.1RA 215.6RA 223.4 233.3RA 227.9 RA 231.9 RA 230.3RA 224.7RA 221.7 223.6 Sulphur dioxide (SO2), kt1 1 766 1 699 1 834 1 975RA 1 843RA 1 849 RA 1 810 RA 1 856RA 1 874 1 950 Nitrous oxide (N2O), t1 2 782 2 757 2 919 2 969 2 980 2 967 2 906 2 825 2 801 2 872 Nitrogen oxide (NO x) as NO2 , kt 2 885 893 937 954 RA 965RA 977RA 977RA 959 RA 957 984 Particulate emissions, kt 65.13 78.37 82.34 78.92RA 80.68 RA 72.42RA 75.84 RA 88.27RA 55.64 50.84 Water Specific water consumption, ℓ/kWh sent out 3 1.42 RA 1.44 RA 1.38 RA 1.35RA 1.42RA 1.34 RA 1.35RA 1.34 RA 1.35 1.32 Net raw water consumption, Mℓ 307 269 314 685 313 078 317 052 334 275 319 772 327 252 316 202 323 190 322 666 Waste Ash produced, Mt 32.61 32.59 34.41 34.97RA 35.30 RA 36.21RA 36.22RA 36.01RA 36.66 36.04 Ash sold, Mt 2.8 2.7 2.5 2.4 2.4 2.3 2.0 2.0 2.1 2.4 Ash recycled, % 8.5 8.3 7.3 7.0 RA 6.8 RA 6.4 RA 5.5RA 5.6 5.7 6.7 Asbestos disposed, tons 383.0 274.5 991.0 458.0 374.6 448.1 611.5 321.4 3 590.8 321.0 Material containing polychlorinated biphenyls thermally destroyed, tons 61.9 59.8 0.0 10.2 0.9 14.3 422.9 19.1 505.6 17.0 Nuclear Public individual radiation exposure due to effluents, mSv4 0.0005 0.0006 0.0010 0.0012 0.0019 0.0024 0.0043 0.0040 0.0045 0.0047 Low-level radioactive waste generated, cubic metres 162.9 176.1 164.1 180.7RA 188.2RA 184.7RA 165.3RA 137.8 140.8 180.3 Low-level radioactive waste disposed of, cubic metres 108.0 213.1 377.6 324.0 RA 54.0 RA 53.8 RA 81.0 RA 216.0 189.0 270.0 Intermediate-level radioactive waste generated, cubic metres 11.4 33.4 27.6 28.7RA 35.7RA 25.4 RA 39.3RA 47.1 23.9 16.5 Intermediate-level radioactive waste disposed of, cubic metres 0 0 138 178 RA 0 RA 128 RA 0 RA 266 474 418 Used nuclear fuel, number of elements discharged5 60 56 112 48 56 60 112 56 56 112 Used nuclear fuel, number of elements discharged, cumulative figure 2 289 2 229 2 173 2 061 2 013 1 957 1 897 1 785 1 729 1 673 Legal contraventions Environmental legal contraventions 28 20 20 34 RA 48 50 63 55 114 46 Environmental legal contraventions reported in terms of the Operational 0 1 1 2RA 2 5 4 0 12 6 Supplementary information Health Dashboard, number6 1. Calculated figures based on coal characteristics and power station design parameters based on coal analysis and using coal burnt tonnages. Figures include coal-fired and gas turbine power stations, as well as oil consumed during power station start-ups and, for carbon dioxide emissions, includes the underground coal gasification pilot plant. 2. NO x reported as NO2 is calculated using average station-specific emission factors (which are measured intermittently) and tonnages of coal burnt. 3. Volume of water consumed per unit of generated power sent out by commissioned power stations. 4. The limit set by the National Nuclear Regulator is ≤0,25mSv. 5. The gross mass of a nuclear fuel element is approximately 670kg, with UO2 mass, typically between 462kg and 464kg. 6. Reported in terms of the 2002 definition of the Operational Health Dashboard. From 2008, repeat legal contraventions are included. RA Reasonable assurance provided by the independent assurance provider. Refer to pages 122 to 125 of the integrated report. Q Qualified by the independent assurance provider. 106 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 107 Five-year non-technical statistics Company Group Measure and unit 2016/17 2015/16 2014/15 2013/14 2012/13 2016/17 2015/16 2014/15 2013/14 2012/13 Finance 1 Electricity revenue per kWh (including environmental levy), c/kWh 83.60 76.24 67.91 62.82 58.49 Electricity operating costs, R/MWh 677.91 635.01 603.33 535.08 487.92 666.91 624.02 590.59 526.50 491.84 Electricity EBITDA margin, % 20.55 19.13 16.28 16.15 17.48 21.44 20.29 16.54 17.23 16.46 EBITDA, R million 35 989 30 932 23 811 22 101 22 147 37 532 32 811 24 186 23 586 20 849 Cash interest cover, ratio 1.77RA 1.69 1.67 2.22 3.97 1.82 1.83 1.88 2.35 4.13 Debt service cover, ratio 1.37 1.09 0.82 1.28 1.98 1.37 1.14 0.91 1.24 1.97 Working capital, ratio 0.86 0.86 0.82 0.70 0.67 0.85 0.83 0.81 0.71 0.68 Gross debt/EBITDA, ratio 11.39 11.71 13.84 12.59 10.09 10.84 10.95 13.60 11.77 10.81 Debt/equity (including long-term provisions), ratio 2.22 RA 1.71 2.67 2.12 1.96RA 2.11 1.65 2.50 2.00 1.84 Gearing, % 69 63 73 68 66 68 62 71 67 65 Free funds from operations, R million 46 336 37 954 36 032 29 528 26 124 47 571 39 443 36 179 31 158 24 615 Free funds from operations after interest paid, R million 19 776 16 260 20 343 18 455 19 090 21 151 17 928 20 564 20 139 18 074 Free funds from operations as % of gross debt, % 11.30 RA 10.48 RA 10.93 10.61 11.69 11.69 10.98 11.00 11.22 10.92 Free funds from operations as % of total capex, % 74.55RA 64.13 63.83 48.98 43.28 75.11 66.23 65.66 52.10 40.93 BPP savings, R billion 20.21RA 17.45RA 8.70 2.30 – Building skills Headcount (including fixed-term contractors) 41 940 42 767 41 787 42 923 43 402 47 658 47 978 46 490 46 919 47 295 Training spend as % of gross employee benefit costs 4.89 RA 4.45 6.18 RA 7.87RA – Total engineering learners in the system, number 1 480 895 1 315 1 962RA 2 144 RA Total technician learners in the system, number 1 209 415 826 815RA 835RA Total artisan learners in the system, number 2 155 1 955 1 752 2 383RA 2 847RA Learner intake 3 048Q 1 370 – – – Transformation Socio-economic contribution Corporate social investment committed, R million 225.3 103.6 115.5 132.9 RA 194.3RA Corporate social investment, number of beneficiaries 841 845 302 736 323 882 357 443RA 652 347RA Job creation, number 39 277 23 169 25 875 25 181RA 35 759 Total number of electrification connections, number 207 189 RA 158 016RA 159 853LA 201 788 RA 139 881 Procurement equity Local content contracted (Eskom-wide), % 73.37Q 75.22Q 25.13 40.80 – Local content contracted (new build), % 85.78Q 84.04 RA 33.62LA 54.60 RA 80.20 B-BBEE attributable expenditure, R billion 137.3 132.0 120.8 125.4 RA 103.4 RA 127.7 125.0 116.0 119.4 RA 96.0 RA Black-owned expenditure, R billion 50.4 51.0 47.5 43.6RA 26.47RA 53.9 52.9 49.4 45.8 RA – Black women-owned expenditure, R billion 17.3 30.2 8.9 9.6RA 5.7RA 19.4 30.8 9.3 9.8 RA 6.0 RA Black youth-owned expenditure, R billion 1.7 1.3 0.9 1.3RA 1.20 RA 2.0 1.4 0.9 1.3RA – Procurement from B-BBEE compliant suppliers, % 100.75RA 83.08 RA 88.89 RA 93.90 RA 86.30 RA 98.25 81.65 89.39 91.80 RA 82.10 RA Procurement from black-owned (BO) suppliers, % 36.98 RA 30.98 RA 34.91 32.70 RA 22.10 41.49 33.61 34.41 35.30 RA – Procurement from black women-owned (BWO) suppliers, % 12.67RA 17.72RA 6.61 7.20 RA 4.70 RA 14.92 19.30 6.49 7.50 RA 5.10 RA Procurement from black youth-owned (BYO) suppliers, % 1.25RA 0.82RA 0.64 LA 1.00 RA 1.00 1.52 0.94 0.63 1.00 RA – Procurement spend with suppliers owned by black people living with disability 0.02 RA 0.01RA 0 0 – 0.02 0.01 0 0 – (BPLwD), % of TMPS Procurement spend with qualifying small enterprises (QSE), % of TMPS 7.67 RA 4.03RA 6.74 11.90 – 8.91 4.62 6.75 15.09 – Procurement spend with exempted micro enterprises (EME), % of TMPS 10.15RA 4.81RA 5.12 – – 11.24 5.89 5.78 – – Technology transfer Acquisition of intellectual capital, R million 31RA 54 RA – – – Skills development, number of people 54 RA 29 RA – – – Job creation, number of people 69 RA 54 RA – – – Supplementary information Employment equity Disabilities, number of employees 1 263 1 271 1 294 1 283RA 1 126RA 1 396 1 311 1 325 1 305RA 1 137RA Employment equity – disability, % 3.01RA 2.97 3.12RA 2.99 RA 2.59 RA 2.93 2.73 2.89 2.77RA 2.43RA Racial equity in senior management, % black employees 65.77RA 60.90 61.58 RA 59.50 RA 58.30 RA 65.80 61.06 61.70 59.30 RA 58.40 Racial equity in professionals and middle management, % black employees 73.60 RA 71.98 72.28 RA 71.20 RA 69.60 73.50 71.68 71.77 70.60 RA 69.00 Gender equity in senior management, % female employees 36.69 RA 28.07 29.83RA 28.90 RA 28.20 RA 36.58 28.13 29.82 28.80 RA 28.50 Gender equity in professionals and middle management, % female employees 36.65RA 36.01 36.10 RA 35.80 RA 34.60 35.98 35.11 35.29 34.90 34.00 1. Ratios impacted by the restatements in the annual financial statements were restated where possible. RA Reasonable assurance provided by the independent assurance provider. Refer to pages 122 to 125 of the integrated report. Q Qualified by the independent assurance provider. LA Limited assurance provided by the independent assurance provider. 108 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 109 Customer information at 31 March 2017 Category 2016/17 2015/16 2014/15 2013/14 2012/13 Category 2016/17 2015/16 2014/15 2013/14 2012/13 Number of Eskom customers Electricity revenue per customer category, R million Local 5 976 546 5 688 629 5 477 591 5 232 904 5 013 435 Local 167 813 154 959 140 074 129 688 114 307 Distributors 802 801 804 801 795 Residential1 5 838 754 5 550 307 5 338 723 5 093 847 4 874 004 Distributors 73 009 66 396 60 051 55 371 49 891 Commercial 50 956 50 816 50 613 50 425 50 399 Residential1 14 070 12 884 11 361 10 181 9 044 Industrial 2 706 2 733 2 773 2 781 2 789 Commercial 11 279 10 157 8 599 7 940 6 972 Mining 1 012 1 013 1 034 1 054 1 062 Industrial 32 701 31 412 30 377 28 305 23 543 Agricultural 81 806 82 450 83 136 83 489 83 877 Mining 25 915 23 895 20 848 19 829 17 620 Rail 510 509 508 507 509 Agricultural 7 659 7 349 6 247 5 645 5 180 Rail 2 990 2 755 2 591 2 417 2 057 International 11 11 11 11 11 IPP network charge 190 111 – – – Utilities 7 7 7 7 7 International 10 682 8 055 6 306 5 887 5 892 End users across the border 4 4 4 4 4 Utilities 6 632 4 163 2 988 2 837 3 149 5 976 557 5 688 640 5 477 602 5 232 915 5 013 446 End users across the border 4 050 3 892 3 318 3 050 2 743 Electricity sales per customer category, Gross electricity revenue 178 495 163 014 146 380 135 575 120 199 GWh Environmental levy included in revenue2 512 513 485 1 322 6 464 Local 199 028 201 022 204 274 205 525 202 770 Less: Revenue capitalised3 (717) (367) – (28) – Less: IAS 18 revenue reversal4 (3 196) (1 472) (597) – – Distributors 89 718 89 591 91 090 91 262 91 386 Residential1 11 863 11 917 11 586 11 017 10 390 Electricity revenue per note 32 in the annual 175 094 161 688 146 268 136 869 126 663 Commercial 10 339 10 150 9 644 9 605 9 519 financial statements Industrial 48 295 50 150 53 467 54 658 51 675 1. Prepayments and public lighting are included under residential. Mining 30 559 30 629 29 988 30 667 31 611 2. T he environmental levy of 2c/kWh tax was effective from 1 July 2009 to 31 March 2011. On 1 April 2011 the levy was raised to Agricultural 5 405 5 733 5 401 5 191 5 193 2.5c/kWh. On 1 July 2012 the levy was raised to 3.5c/kWh. The levy is payable for electricity produced from non-renewable sources Rail 2 849 2 852 3 098 3 125 2 996 (coal, nuclear and petroleum). The levy is raised on the total electricity production volumes and is recovered through sales. International 15 093 13 465 12 000 12 378 13 791 3. Revenue from the sale of production while testing generating plant not yet commissioned, capitalised to plant. 4. T he IAS 18 principle of only recognising revenue if it is deemed collectable at the date of sale, as opposed to recognising the revenue Utilities 5 750 4 018 2 797 3 401 4 659 and then impairing the customer debt when conditions change, has been applied since 2015. External revenue to the value of End users across the border 9 343 9 447 9 203 8 977 9 132 R3 196 million was thus not recognised at 31 March 2017. 214 121 214 487 216 274 217 903 216 561 International sales to countries in southern Africa, GWh 15 093 13 465 12 000 12 378 13 791 Botswana 984 1 099 1 237 1 608 2 574 Lesotho 252 205 230 122 255 Mozambique 8 120 8 281 8 360 8 314 8 284 Namibia 2 089 1 746 924 1 248 1 822 Swaziland 986 1 044 882 741 598 Zambia 352 344 16 143 253 Zimbabwe 1 743 252 108 154 3 Short-term energy market 2 567 494 243 48 2 1. Prepayments and public lighting are included under residential. 2. The short-term energy market consists of all the utilities in the southern African countries that form part of the Southern African Power Pool. Energy is traded on a daily, weekly and monthly basis as there is no long-term bilateral contract. Supplementary information 110 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 111 Power station capacities at 31 March 2017 The difference between installed and nominal capacity reflects auxiliary power consumption and reduced capacity Total caused by the age of plant. nominal capacity Number and Total Total Name of station MW Years installed capacity installed nominal commissioned, of generator sets capacity capacity Nominal capacity of Eskom-owned power stations 44 134 Name of station Location first to last unit MW MW MW IPP capacity 5 027 Base-load stations Solar energy 1 474 Coal-fired (14) 38 548 36 441 Wind 1 419 Gas/liquid fuel 1 258 Arnot Middelburg Sep 1971 to Aug 1975 1x370; 1x390; 2x396; 2x400 2 352 2 232 Coal 455 Camden1, 2 Ermelo Mar 2005 to Jun 2008 3x200; 1x196; 2x195; 1x190; 1x185 1 561 1 481 Concentrated solar power 200 Duvha3 Emalahleni Aug 1980 to Feb 1984 6x600 3 600 3 450 Hydroelectric 14 Grootvlei1 Balfour Apr 2008 to Mar 2011 4x200; 2x190 1 180 1 120 Other 207 Hendrina 2 Middelburg May 1970 to Dec 1976 4x200; 3x195; 2x170; 1x168 1 893 1 793 Kendal 4 Emalahleni Oct 1988 to Dec 1992 6x686 4 116 3 840 Komati1, 2 Middelburg Mar 2009 to Oct 2013 4x100; 4x125; 1x90 990 904 Total nominal capacity available to the grid – Eskom and IPPs 49 161 Kriel Bethal May 1976 to Mar 1979 6x500 3 000 2 850 1. Former mothballed power stations that have been returned to service. The original commissioning dates were: Lethabo Vereeniging Dec 1985 to Dec 1990 6x618 3 708 3 558 Komati was originally commissioned between November 1961 and March 1966. Majuba4 Volksrust Apr 1996 to Apr 2001 3x657; 3x713 4 110 3 843 Camden was originally commissioned between August 1967 and September 1969. Matimba4 Lephalale Dec 1987 to Oct 1991 6x665 3 990 3 690 Grootvlei was originally commissioned between June 1969 and November 1977. Matla Bethal Sep 1979 to Jul 1983 6x600 3 600 3 450 Tutuka Standerton Jun 1985 to Jun 1990 6x609 3 654 3 510 2. Due to technical constraints, some coal-fired units at these stations have been de-rated. Medupi4 Lephalale Unit 6: Aug 2015 6x794 794 720 3. Duvha Unit 3 (600MW installed capacity) is out of commission and will be rebuilt. Kusile4 Ogies Under construction 6x800 – – 4. Dry-cooled unit specifications based on design back-pressure and ambient air temperature. 5. Pumped storage facilities are net users of electricity. Water is pumped during off-peak periods so that electricity can be generated during peak periods. Nuclear (1) 6. Use is restricted to periods of peak demand, dependent on the availability of water in the Gariep and Vanderkloof Dams. Koeberg Cape Town Jul 1984 to Nov 1985 2x970 1 940 1 860 7. The concentrated solar project (100MW) previously shown as under construction has been cancelled. 8. Installed and operational, but not included for capacity management purposes. Peaking stations Gas/liquid fuel turbine stations (4) 2 426 2 409 Acacia Cape Town May 1976 to Jul 1976 3x57 171 171 Ankerlig Atlantis Mar 2007 to Mar 2009 4x149.2; 5x148.3 1 338 1 327 Polokwane Gourikwa Mossel Bay Jul 2007 to Nov 2008 5x149.2 746 740 Port Rex East London Sep 1976 to Oct 1976 3x57 171 171 Pumped storage schemes (3)5 2 732 2 724 Pretoria Drakensberg Bergville Jun 1981 to Apr 1982 4x250 1 000 1 000 Ingula Ladysmith Jun 2016 to Feb 2017 4x333 1 332 1 324 Johannesburg Palmiet Grabouw Apr 1988 to May 1988 2x200 400 400 Hydroelectric stations (2) 6 600 600 Upington Gariep Norvalspont Sep 1971 to Mar 1976 4x90 360 360 Vanderkloof Petrusville Jan 1977 to Feb 1977 2x120 240 240 Richards Bay Kimberley Bloemfontein Renewables Durban Wind energy (1) Sere Vredendal Mar 2015 46x2.2 100 100 Solar energy Concentrated Upington Cancelled – – – solar power7 Other hydroelectric East London Supplementary information stations (4) 8 61 – Port Elizabeth Colley Wobbles Mbashe River 3x14 42 – Cape Town First Falls Umtata River 2x3 6 – Mossel Bay Ncora Ncora River 2x0.4; 1x1.3 2 – Second Falls Umtata River 2x5.5 11 – Existing Interconnection substation Nuclear power station Not yet complete Town Future gas station Total power station capacities (29) 46 407 44 134 Possible future grid system Future renewables Gas power station Future hydroelectric power station Renewables Future substation Available nominal capacity – Eskom-owned 95.10% Future thermal power station Thermal power station Hydroelectric power station Future interconnection substation 112 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 113 Power lines and substations in service Benchmarking information at 31 March 2017 Category 2016/17 2015/16 2014/15 2013/14 2012/13 The fact sheet details the benchmarking exercises The results indicate that: undertaken by the Generation Division. • The trend in the performance of our coal-fired Power lines plant across all indicators continues to be worse Transmission power lines, km1 32 220 31 957 31 107 29 924 29 297 Coal-fired stations than the VGB benchmark 765kV 2 782 2 608 2 235 2 235 1 667 Generation benchmarks the performance of its coal- • The availability of the top performing stations in the 533kV DC (monopolar) 1 035 1 035 1 035 1 035 1 035 fired power stations against those of the members VGB benchmark has historically been consistent, 400kV 2 18 943 18 872 18 377 17 011 16 899 of VGB (Vereinigung der Großkesselbesitzer e.V), a although showing signs of instability from 2012 275kV 7 358 7 343 7 361 7 361 7 360 European-based technical association for electricity when a decline was observed 220kV 1 220 1 217 1 217 1 217 1 217 and heat generation industries. VGB’s objective is to • Eskom units generally compare favourably with 132kV 882 882 882 1 065 1 119 provide support and facilitate the improvement of the VGB benchmark with respect to planned Distribution power lines, km 48 805 49 210 48 278 46 093 44 396 operating safety, environmental compatibility and the maintenance in the median and low quartiles, while availability and efficiency of power plants for electricity Eskom’s best performing units continue to be 132kV and higher 25 011 25 528 24 929 22 719 21 508 and heat generation, either in operation or under better than that of VGB benchmark units 33 to 88kV 23 794 23 682 23 349 23 374 22 888 construction. • Since 2012, Eskom’s UCLF performance showed Reticulation power lines, km a significant deterioration compared to the VGB 22kV and lower 296 188 288 550 281 510 276 027 269 570 When interpreting the results of the benchmarking study, it must be noted that the operating regimes of benchmark on all quartiles other utilities contributing to the VGB database may • With respect to the use of available plant (energy Underground cables, km 7 499 7 571 7 436 7 293 7 026 not be the same as those of Eskom. utilisation factor or EUF), all Eskom coal-fired 132kV and higher 75 66 65 65 65 units are performing at a level close to, and in many 33 to 88kV 215 375 361 364 212 cases above, the VGB best quartile, an indication 22kV and lower 7 209 7 130 7 010 6 864 6 749 that Eskom is running its power station units at much higher levels than the VGB benchmark units Total all power lines, km 384 712 377 287 368 331 359 337 350 289 100 Total transformer capacity, MVA 276 583 244 637 239 490 232 179 225 799 95 Transmission, MVA 3 147 415 143 440 139 610 138 350 135 840 90 Distribution and reticulation, MVA 129 168 101 197 99 880 93 829 89 959 85 80 Total transformers, number 375 995 342 387 335 242 329 314 320 501 75 Transmission, number 433 427 423 420 412 70 Distribution and reticulation, number 372 562 341 960 334 819 328 894 320 089 65 1. Transmission power line lengths are included as per distances from the Geographic Information System (GIS). 60 2. The Majuba Umfolozi No 1 765kV line, even though constructed at 765kV, is currently still being operated at 400kV and thus reflected under 55 the 400kV total. 50 3. Base of definition: transformers rated ≥30MVA and primary voltage ≥132kV. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Calendar years Energy availability factor (EAF), all coal sizes (82 VGB units, excluding Eskom units), % VGB worst quartile Eskom worst quartile VGB median Eskom median VGB best quartile Eskom best quartile Unplanned capability loss factor (UCLF), all coal sizes (92 VGB units, excluding Eskom units), % 30 25 20 15 10 Supplementary information 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Calendar years Unplanned capability loss factor (UCLF), all coal sizes (82 VGB units, excluding Eskom units), % VGB worst quartile Eskom worst quartile VGB median Eskom median VGB best quartile Eskom best quartile 114 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 115 Benchmarking information continued Planned capability loss factor (PCLF), all coal sizes (92 VGB units, excluding Eskom units), % 25 95 90 20 85 15 80 75 10 70 5 65 0 60 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar 17 Calendar years Calendar years Planned capability loss factor (PCLF), all coal sizes (82 VGB units, excluding Eskom units), % Unit capability factor (UCF) for all pressurised water reactor (PWR) units worldwide, % VGB worst quartile Eskom worst quartile VGB median Eskom median VGB best quartile Eskom best quartile Koeberg mean Worldwide PWR worst quartile Worldwide PWR median Worldwide PWR best quartile 10 95 85 8 75 6 65 4 55 2 45 0 35 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar 17 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Calendar years Calendar years Unplanned capability loss factor (UCLF) for all pressurised water reactor (PWR) units worldwide, % Energy utilisation factor (EUF), all coal sizes (82 VGB units, excluding Eskom units), % Koeberg mean Worldwide PWR worst quartile Worldwide PWR median Worldwide PWR best quartile VGB worst quartile Eskom worst quartile VGB median Eskom median VGB best quartile Eskom best quartile 2.0 Koeberg Nuclear Power Station We areutilisation Energy affiliated to(EUF), factor the all World Association coal sizes (92 VGB units,ofexcluding For theunits), Eskom review % period, Koeberg performance has Nuclear Operators (WANO) and the Institute of generally been better than the median for the suite 1.5 Nuclear Power Operations (INPO). South Africa of WANO performance indicators. The complete is a member of the International Atomic Energy suite of WANO performance indicators is not Agency (IAEA). These affiliations enable us to shown here. 1.0 benchmark performance, conduct periodic safety reviews, define standards, disseminate best practice The graphs that follow depict the performance and train personnel at our nuclear plant, Koeberg. A of Koeberg Nuclear Power Station against all 0.5 routine WANO peer review of Koeberg was carried pressurised water reactor (PWR) units worldwide. out in February 2017. Supplementary information Through INPO, we have maintained our 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar 17 accreditation from the National Nuclear Training Calendar years Academy in the United States for our systematic Unplanned automatic scrams for all pressurised water reactor (PWR) units worldwide, UA7 rate per 7 000 hours approach to the training of licensed and non-licensed nuclear operators at Koeberg. We are the only non- Koeberg mean Worldwide PWR worst quartile Worldwide PWR median Worldwide PWR best quartile US utility to have received such accreditation. 116 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 117 Benchmarking information Environmental implications of using or saving electricity continued 1.2 Factor 1 figures are calculated based on total electricity sales by Eskom, which is based on the total available for distribution (including purchases), after excluding losses through Transmission and Distribution (technical losses), 1.0 losses through theft (non-technical losses), our own internal use and wheeling. Thus to calculate CO2 emissions, divide the quantity of CO2 emitted by the electricity sales: 0.8 211.1Mt of CO2 ÷ 214 121GWh of sales = 0.99 tons per MWh Factor 2 figures are calculated based on total electricity generated, which includes coal, nuclear, 0.6 pumped storage, wind, hydro and gas turbines, but excludes the total consumed by Eskom. Thus the quantity of CO2 emissions divided by (electricity generated less Eskom’s own electricity consumption): 0.4 211.1Mt ÷ (220 166GWh generated less 4 808GWh own consumption) = 0.98 tons per MWh 0.2 Figures represent the 12-month period from 1 April 2016 to 31 March 2017. Factor 1 Factor 2 If electricity consumption is measured in: 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar 17 (total energy (total energy Calendar years sold) generated) kWh MWh GWh TWh 12-month collective radiation exposure (CRE) for all pressurised water reactor (PWR) units worldwide, man-Sieverts per unit Coal use 0.53 0.53 kilogram ton thousand tons (kt) million tons (Mt) Water use1 1.44 1.43 litre kilolitre megalitre (Mℓ) thousand megalitres Koeberg mean Worldwide PWR worst quartile Worldwide PWR median Worldwide PWR best quartile Ash produced 152 151 gram kilogram ton thousand tons (kt) Particulate 0.30 0.30 gram kilogram ton thousand tons (kt) emissions CO2 emissions2 0.99 0.98 kilogram ton thousand tons (kt) million tons (Mt) 1.00 SO x emissions2 8.25 8.20 gram kilogram ton thousand tons (kt) NO x emissions3 4.13 4.11 gram kilogram ton thousand tons (kt) 0.75 1. Volume of water used at all Eskom power stations. 2. Calculated figures based on coal characteristics and power station design parameters. Sulphur dioxide and carbon dioxide emissions are based on coal analysis and using coal burnt tonnages. Figures include coal-fired and gas turbine power stations, as well as oil consumed during power station start-ups and, for carbon dioxide emissions, the underground coal gasification pilot plant. 0.50 3. NOx reported as NO2 is calculated using average station-specific emission factors, which have been measured intermittently between 1982 and 2006, and tonnages of coal burnt. 0.25 Multiply electricity consumption or saving by the relevant factor in the table above to determine the environmental implication. Example 1: Water consumption Example 2: CO2 emissions 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar 17 Using Factor 1 Using Factor 1 Used 90MWh of electricity Used 90MWh of electricity 90 X 1.44 = 129.6 90 x 0.99 = 89.1 36-month collective radiation exposure (CRE) for all pressurised water reactor (PWR) units worldwide, man-Sieverts per unit Therefore 129.6 kilolitres of water used Therefore 89.1 tons CO2 emitted Koeberg mean Worldwide PWR worst quartile Worldwide PWR median Worldwide PWR best quartile Using Factor 2 Using Factor 2 Used 90MWh of electricity Used 90MWh of electricity 90 x 1.43 = 128.7 90 x 0.98 = 88.2 Therefore 128.7 kilolitres of water used Therefore 88.2 tons CO2 emitted 100 90 Further information can be obtained through the Eskom Environmental Helpline. Contact details are available at the back of the integrated report 80 For CDM-related Eskom grid emission factor information, please go to the following link: www.eskom.co.za/OurCompany/SustainableDevelopment/Pages/CDM_Calculations.aspx or via the Eskom website: Our Company > Sustainable Development > CDM calculations 70 Supplementary information 60 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar 17 Calendar years WANO index for members of WANO Atlanta Center, various reactor types Koeberg mean WANO-AC worst quartile WANO-AC median WANO-AC best quartile 118 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 119 Board and Exco meeting attendance Attendance at Board and committee meetings for the year ended 31 March 2017 Attendance at Exco meetings for the year ended 31 March 2017 Board Number of Investment Recovery Social, meetings Audit and People and and Build Ethics and Board Executive Divisional responsibility attended Members Board and Risk Finance Governance Programme Sustainability Tender Total number of meetings 9 Total number of meetings 17 5 9 7 1 4 13 Mr B Molefe Group Chief Executive (went on early retirement effective 31 December 2016) 1/5 Independent non-executives Mr MM Koko Interim Group Chief Executive (from 1 December 2016, previously Group Executive: 7/9 Current members Generation) Dr BS Ngubane *16/17 4/7 1/1 Mr A Singh Chief Financial Officer 8/9 Mr ZW Khoza 16/17 9/9 7/7 4/4 *13/13 Mr P Govender Acting Group Executive: Group Capital (from 22 March 2017) 1/1 Ms VJ Klein 15/17 5/5 9/9 *7/7 4/4 Mr T Govender Group Executive: Transmission and Sustainability 8/9 Mr G Leonardi 8/17 3/5 2/7 1/3 Mr W Majola Acting Group Executive: Generation (from 1 January 2017) 1/3 Ms C Mabude 16/17 *5/5 *6/6 5/7 1/1 13/13 Mr S Maritz Group Executive: Information Technology and Chief Information Officer 5/7 (from 1 June 2016) Dr P Naidoo 14/17 5/5 9/9 1/1 *4/4 10/10 Mr AA Masango Group Executive: Office of the Group Chief Executive (from 22 March 2017, Previous members 8/9 previously Group Executive: Group Capital) Ms N Carrim Ms A Noah Group Executive: Customer Services 5/9 3/3 2/2 1/1 1/1 2/3 (resigned 30 June 2016) Mr MM Ntsokolo Group Executive: Distribution 7/9 Ms M Cassim 0/0 (resigned 14 April 2016) Ms EM Pule Group Executive: Human Resources (from 1 June 2016) 7/9 Mr R Kumalo 0/0 0/1 0/0 (resigned 12 April 2016) Ms DV Naidoo 3/3 1/1 1/1 3/3 (resigned 30 June 2016) Mr MV Pamensky 7/10 2/2 3/3 (resigned 25 November 2016) Executives Mr A Singh 15/17 1/1 Mr B Molefe (went on early retirement effective 7/12 0/6 0/1 0/3 31 December 2016) Attendance as reflected above refers to directors who were members of that committee during the year to 31 March 2017, and reflects changes due to rotation of members in committee memberships. An asterisk denotes the chairmanship of the Board or committee at 31 March 2017. The Board Recovery and Build Programme committee was dissolved on 30 June 2016. Supplementary information 120 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 121 Independent sustainability assurance report Independent assurance provider’s reasonable assurance report on selected key No. Indicator Unit of measure Boundary Reporting criteria performance indicators to the directors of Eskom Ensure financial sustainability Introduction R million/ We have been engaged to perform an independent assurance engagement for Eskom Holdings SOC Ltd (Eskom) 18. Operating cost per employee1 Eskom full-time employee on selected key performance indicators (KPIs) reported in Eskom’s integrated report for the year ended 19. Cash interest cover 1 Ratio Eskom 31 March 2017. Our engagement was conducted by a team with relevant experience in sustainability reporting. 20. Debt equity ratio Ratio Eskom Subject matter We are required to provide reasonable assurance on the following selected sustainability key performance indicators 21. Free funds from operations as percentage of gross debt % Eskom Eskom’s measurement to be published in the integrated report, which include the indicators contained in the Eskom’s shareholder compact 22. Business productivity programme savings R Eskom specification as well as KPIs selected by the directors. The KPIs described below cover only Eskom (company and not group) 23. Free funds from operations as percentage of capex1 % Eskom and have been prepared in accordance with Eskom’s reporting criteria that are available on Eskom’s website, at www.eskom.co.za/OurCompany/SustainableDevelopment/Pages/Sustainable_Development.aspx 24. Average debtors days for municipalities, top customers, Days Eskom LPUs and SPUs (excluding Soweto)1 No. Indicator Unit of measure Boundary Reporting criteria 25. Coal purchased R/ton Eskom Focus on safety Human capital Lost-time injury rate (LTIR) (excluding occupational Occupational Health 26. Training spend as % of gross manpower costs % Eskom 1. Index Eskom diseases)1 and Safety Act 27. Learner intake1 Number Eskom Improve operations 28. Disability equity in total workforce % Eskom 2. Planned capability loss factor (PCLF) Percentage Generation Eskom’s measurement 29. Racial equity in senior management % Eskom specification 3. Energy availability factor (EAF) Percentage Generation 30. Gender equity in senior management % Eskom 4. System average interruption duration index (SAIDI) Hours Distribution Eskom’s measurement 31. Racial equity in professional and middle management % Eskom 5. System average interruption frequency index (SAIFI) Number Distribution specification 32. Gender equity in professional and middle management % Eskom 6. System minutes <1 Minutes Transmission Economic impact 7. Distribution total energy losses1 % Distribution 33. Percentage of local content contracted in new build % Eskom Deliver capital expansion Eskom’s measurement Percentage of local sourcing in procurement specification 34. % Eskom 8. Generation capacity installed and commissioned MW Generation (Eskom wide) 9. Transmission lines installed Km Transmission Percentage of B-BBEE attributable spend against total 35. % Eskom Eskom’s measurement measured procurement spend (TMPS) Transmission transformer capacity installed and specification 10. MVA Transmission 36. Percentage of BO attributable spend against TMPS % Eskom commissioned 11. Distribution capex for strengthening and refurbishment1 Rands Distribution 37. Percentage of BWO attributable spend against TMPS % Eskom B-BBEE amended codes Reduce environmental footprint in existing fleet 38. Percentage of BYO attributable spend against TMPS % Eskom of good practice 12. Relative particulate emissions kg/MWh sent out Generation Environmental Act 39. Percentage of BPLwD attributable spend against TMPS % Eskom 13. Water usage ℓ/kWh sent out Generation Water Act 40. Percentage of QSE attributable spend against TMPS % Eskom 14. Migration of coal delivery volume from road to rail Mt Generation 41. Percentage of EME attributable spend against TMPS % Eskom Eskom’s measurement 15. Carbon dioxide emissions2 Mt Generation specification 42. Technology transfer (acquisition of intellectual property) Number Eskom Eskom’s measurement Compliance capital investments 43. Technology transfer (skills development) Number Eskom specification 16. N–1 compliance – new build1 R million Group Capital 44. Technology transfer (job creation) Number Eskom Eskom’s measurement 17. Environmental compliance 1 R million Group Capital specification Electrification Eskom’s measurement 45. Department of Energy funded electrification connections2 Number Eskom specification 1. Not assured in the prior year. Supplementary information 2. Not included in the shareholder compact. 122 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 123 Independent sustainability assurance report continued Directors’ responsibilities and perform our engagement to obtain reasonable • Applied the assurance criteria in evaluating the data The maintenance and integrity of the Eskom website The directors are responsible for the selection, assurance about whether the selected KPIs are free generation and reporting processes is the responsibility of Eskom management. Our preparation and presentation of the sustainability from material misstatement. • Reviewed the processes and systems to generate, procedures did not involve consideration of these information in accordance with the Eskom’s reporting collate, aggregate, monitor and report on the matters and, accordingly we accept no responsibility criteria. This responsibility includes the identification A reasonable assurance engagement in accordance selected key performance indicators for any changes to either the information in the report of stakeholders and stakeholder requirements, with ISAE 3000 (revised) involves performing • Evaluated the reasonableness and appropriateness or our independent reasonable assurance report material issues, commitments with respect to procedures to obtain evidence about the quantification of significant estimates and judgements made that may have occurred since the initial date of its sustainability performance and design, implementation of the selected sustainability information and by management in the preparation of the key presentation on the Eskom website. and maintenance of internal control relevant to the related disclosures. The nature, timing and extent performance indicators preparation of the report that is free from material of procedures selected depend on our judgement, • Performed site work at various coal-fired Restriction of liability misstatement, whether due to fraud or error. including the assessment of the risks of material power stations, Transmission operating units and Our work has been undertaken to enable us to misstatement, whether due to fraud or error. In making Distribution operating units express the conclusions on the selected KPIs to the Inherent limitations those risk assessments we considered internal control • Evaluated whether the selected key performance directors of Eskom in accordance with the terms Non-financial performance information is subject to relevant to Eskom’s preparation of the selected KPIs. indicators presented in the integrated report of our engagement and for no other purpose. We more inherent limitations than financial information, A reasonable assurance engagement also includes: are consistent with our overall knowledge and do not accept or assume liability to any party other given the characteristics of the subject matter and the • Assessing the suitability in the circumstances of experience of sustainability management and than Eskom, for our work, for this report, or for the method used for determining, calculating, sampling Eskom’s use of its reporting criteria as the basis for performance at Eskom conclusion we have reached. and estimating such information. The absence of a preparing the selected sustainability information significant body of established practice on which to • Evaluating the appropriateness of quantification We believe that the evidence we have obtained is draw allows for the selection of certain different but methods and reporting policies used, and the sufficient and appropriate to provide a basis for our acceptable measurement techniques which can result reasonableness of estimates made by Eskom conclusions. in materially different measurements and can impact • Evaluating the overall presentation of the selected comparability. Qualitative interpretations of relevance, Basis for qualified conclusion KPIs SizweNtsalubaGobodo Inc. materiality and the accuracy of data are subject to The completeness of the Learner intake KPI could Summary of work performed not be established in 33% of the sites visited due to Registered auditors individual assumptions and judgments. The precision thereof may change over time. It is important to read Our work included examination, on a test basis, inadequate processes and systems in place to ensure Per BF Zwane the report in the context of the reporting criteria. of evidence relevant to the selected sustainability that all learners are accounted for. Chartered Accountant (SA) information. It also included an assessment of Director In particular, where the information relies on the The validity and accuracy of the Coal migration KPI the significant estimates and judgments made by factors derived by independent third parties, our could not be confirmed as the processes and systems the directors in the preparation of the selected 15 June 2017 assurance work has not included examination of put in place to collate, review and monitor the data sustainability information. We planned and performed the derivation of those factors and other third party that supports the reliable measurement of the KPI our work so as to obtain all the information and information. are not complied with. The alternative procedures explanations that we considered necessary in order to performed confirmed the weaknesses in the provide us with sufficient evidence on which to base Our independence and quality control environment. Furthermore the completeness of the our conclusion in respect of the selected sustainability We have complied with the independence and all number reported could not be ascertained. information. other ethical requirements of the Code of Professional Conduct for Registered Auditors issued by the The validity, accuracy and completeness of the Local Our procedures included the understanding of risk Independent Regulatory Board of Auditors, which content (Eskom-wide and new build) KPI could not assessment procedures, internal control, and the is founded on fundamental principles of integrity, be confirmed due to audit evidence that was not procedures performed in response to the assessed objectivity, professional competence and due care, sufficient and appropriate to validate these assertions. risks. The procedures we performed were based on confidentiality and professional behaviour. our professional judgment and included inquiries, Conclusion observation of processes performed, inspection In our opinion, except for the effects of the matters SizweNtsalubaGobodo Inc. applies the International of documents, analytical procedures, evaluating described in the “Basis for qualified conclusion” Standard on Quality Control 1 and accordingly the appropriateness of quantification methods and section of our report, the directors’ statement that maintains a comprehensive system of quality control reporting policies, and agreeing or reconciling with the key performance indicators are presented in including documented policies and procedures underlying records. accordance with Eskom Holdings SOC Ltd’s reporting regarding compliance with ethical requirements, professional standards and applicable legal and criteria is, in all material respects, fairly stated. Given the circumstances of the engagement, in regulatory requirements. performing the procedures listed above we: Other matters • Interviewed management and senior executives Our report includes the provision of reasonable Our responsibility to obtain an understanding of the internal assurance on selected KPIs, on which we were Our responsibility is to express a reasonable control environment, risk assessment process and previously not required to provide assurance, as assurance conclusion on the selected KPIs based on Supplementary information information systems relevant to the sustainability indicated in the table above. Hence, with regard the procedures we have performed and the evidence reporting process to these KPIs, the current year information relating we have obtained. We conducted our reasonable • Inspected documentation to corroborate the to prior reporting periods has not been subject to assurance engagement in accordance with the statements obtained from management and senior assurance procedures. International Standard on Assurance Engagements executives in our interviews (ISAE) 3000 (revised), Assurance Engagements other • Reviewed the process that Eskom has in place for than Audits or Reviews of Historical Financial Information, determining material selected key performance issued by the International Auditing and Assurance indicators to be included in the report Standards Board. That Standard requires that we plan 124 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 125 GRI G4 indicator table We have provided some GRI disclosures in our 2017 integrated report.The disclosures provided are set out in the Ref Description Reference table below, with a reference to where in the document the information may be found. G4-16 List memberships of associations (such as industry associations) Our key strategic international memberships General standard disclosures and national or international advocacy organisations in which the include Electric Power Research Institute organisation holds a position on the governance body, participates in (EPRI), World Economic Forum (WEF), World Ref Description Reference projects or committees, provides substantive funding beyond routine Association of Nuclear Operators (WANO), Strategy and analysis membership dues, or views membership as strategic Pressurised Water Reactor Owners' Group (PWROG), and Institute of Nuclear Power G4-1 Statement from most senior decision-maker about the relevance Chairman’s statement, page 3 Operations (INPO) of sustainability and the organisation’s strategy for addressing sustainability. The statement should present the overall vision and EU1 Installed capacity, broken down by primary energy source and by Nature of our business and customer base, page 5 strategy for the short term, medium term, and long term, particularly regulatory regime Fact sheet on power station capacities, page 112 with regard to managing the significant economic, environmental and EU2 Net energy output broken down by primary energy source and by Eskom’s energy wheel, page 7 social impacts that the organisation causes and contributes to, or the regulatory regime impacts that can be linked to its activities as a result of relationships with others (such as suppliers, people or organisations in local EU3 Number of residential, industrial, institutional and commercial Fact sheet on customer information, page 110 communities) customer accounts G4-2 Description of key impacts, risks, and opportunities (including Our strategic risks, pages 29 and 30 EU4 Length of above and underground transmission and distribution lines Nature of our business and customer base, page 5 the organisation’s key impacts on sustainability and effects on Identifying and prioritising opportunities, page 30 by regulatory regime Fact sheet on power lines and substations in stakeholders, and the impact of sustainability trends, risks, and service, page 114 opportunities on the long-term prospects and financial performance of the organisation) EU5 Allocation of CO2e emissions allowances or equivalent, broken down Not applicable – carbon budgets will only become by carbon trading framework mandatory from 2020 Organisational profile Identified material aspects and boundaries G4-3 Report the name of the organisation Contact details, page 132 G4-17 List all entities included in the organisation’s consolidated financial Legal structure, page 11 G4-4 Report the primary brands, products, and services Our mandate, vision and mission, page 4 statements, and report any entity included in the organisation’s Annual financial statements, note 12 consolidated financial statements not covered by the report G4-5 Report the location of the organisation’s headquarters Legal structure, page 11 G4-18 Explain the process for defining the report content and the Aspect Basis of preparation, IFC G4-6 Report the number of countries where the organisation operates, Legal structure, page 11 Boundaries, and how the organisation has implemented the Reporting We believe that the principles of stakeholder and names of countries where either the organisation has significant Principles for Defining Report Content inclusiveness, sustainability context, materiality operations or that are specifically relevant to the sustainability topics and completeness have been addressed in this covered in the report integrated report G4-7 Report the nature of ownership and legal form Our mandate, vision and mission, page 4 G4-19 List all the material Aspects identified in the process for defining Not applicable. We have not reported on G4-8 Report the markets served (including geographic breakdown, sectors Nature of our business and customer base, pages report content material Aspects served, and types of customers and beneficiaries) 4 and 5 G4-20 For each material Aspect, report the Aspect Boundary within the Not applicable. We have not reported on Fact sheet on customer information, page 110 organisation material Aspects G4-9 Report the scale of the organisation (including total number of Eskom’s energy wheel, page 7 G4-21 For each material Aspect, report the Aspect Boundary outside the Not applicable. We have not reported on employees, operations, net sales, total capitalisation broken down Our business model, page 9 organisation material Aspects in terms of debt and equity, and quantity of products or services Our impact on the capitals, page 10 provided) Building sustainable skills – Headcount, page 67 G4-22 Report the effect of any restatements of information provided in Not applicable for the integrated report Fact sheet on customer information, pages 110 previous reports, and the reasons for such restatements The annual financial statements have been and 111 restated – refer Key accounting policies, significant judgements and estimates, page 81 and G4-10 Report the total number of employees by employment contract Building sustainable skills – Headcount, page 67 note 49 in the annual financial statements and gender, as well as permanent employees, supervised workforce, Transformation and social sustainability – workforce by region and gender, workers legally recognised as self- Improving internal transformation, page 72 G4-23 Report significant changes from previous reporting periods in the Not applicable employed, or employees of contractors, and significant variations in Scope and Aspect Boundaries employment numbers (due to seasonal variations) Stakeholder engagement G4-11 Report the percentage of total employees covered by collective Building sustainable skills – Headcount, page 67 bargaining agreements G4-24 Provide a list of stakeholder groups engaged by the organisation Stakeholder groups, page 24 Stakeholder engagements and topics covered, G4-12 Describe the organisation’s supply chain Transformation and social sustainability – Our pages 25 and 26 contribution to supplier development, page 71 G4-25 Report the basis for identification and selection of stakeholders with Stakeholder groups, page 24 G4-13 Report any significant changes during the reporting period regarding Not applicable whom to engage the organisation’s size, structure, ownership, or its supply chain G4-26 Report the organisation’s approach to stakeholder engagement, Stakeholder engagement and material matters, G4-14 Report whether and how the precautionary approach or principle is We do not currently apply the precautionary including frequency of engagement by type and by stakeholder group, page 24 addressed by the organisation approach and an indication of whether any of the engagement was undertaken Stakeholder engagements and topics covered, specifically as part of the report preparation process pages 25 and 26 Supplementary information G4-15 List externally developed economic, environmental and social United Nations Global Compact; other key UN charters, principles, or other initiatives to which the organisation initiatives, such as the CEO Water Mandate, G4-27 Report key topics and concerns that have been raised through Stakeholder engagements and topics covered, subscribes or which it endorses Caring for Climate, as well as Sustainable Energy stakeholder engagement, and how the organisation has responded pages 25 and 26 for All; Carbon Disclosure Project. We are also a to those key topics and concerns, including through its reporting. UNGC LEAD company, recognised for leadership Report the stakeholder groups that raised each of the key topics and in the sustainability field. We are a member of the concerns IIRC’s Business Network and Public Sector Pioneer Network 126 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 127 GRI G4 indicator table continued Ref Description Reference Ref Description Reference Report profile G4-42 Report the highest governance body’s and senior executives’ roles Our leadership, page 19 in the development, approval, and updating of the organisation’s Board of Directors and committees, pages 94 G4-28 Reporting period (such as fiscal or calendar year) for information Reporting boundary and frameworks, IFC purpose, value or mission statements, strategies, policies, and goals to 96 provided related to economic, environmental and social impacts G4-29 Date of most recent previous report Reporting boundary and frameworks, IFC G4-43 Report the measures taken to develop and enhance the highest Director induction and training, page 95 governance body’s collective knowledge of economic, environmental G4-30 Reporting cycle We report annually and social topics G4-31 Provide the contact point for questions regarding the report or its Comments may be sent to G4-44 Report the processes for evaluation of the highest governance body’s Board evaluation, page 95 contents IRfeedback@eskom.co.za (also noted on the inside performance with respect to governance of economic, environmental flap and under contact details) and social topics. Report whether such evaluation is independent or G4-32 Report the “in accordance” option the organisation has chosen, Not applicable. This report is not prepared in not, and its frequency, and whether it is a self-assessment. Report as well as the GRI Content Index for the chosen option, and the accordance with GRI G4 reporting criteria, actions taken in response to evaluation of the highest governance reference to the External Assurance Report, if the report has been although it contains some GRI disclosures body’s performance with respect to governance of economic, externally assured environmental and social topics, including, as a minimum, changes in membership and organisational practice G4-33 Report the organisation’s policy and current practice with regard Assurance approach, IFC to seeking external assurance for the report. If not included in the Combined assurance, page 33 G4-45 Report the highest governance body’s role in the identification and Enterprise risk management process, page 28 assurance report accompanying the sustainability report, report the management of economic, environmental and social impacts, risks, scope and basis of any external assurance provided, as well as the and opportunities. Include the highest governance body’s role in relationship between the organisation and the assurance providers. the implementation of due diligence processes. Report whether Report whether the highest governance body or senior executives stakeholder consultation is used to support the highest governance are involved in seeking assurance for the organisation’s sustainability body’s identification and management of economic, environmental report and social impacts, risks, and opportunities Governance G4-46 Report the highest governance body’s role in reviewing the Risk management and internal controls, page 31 effectiveness of the organisation’s risk management processes for G4-34 Report the governance structure of the organisation, including Board of Directors and committees, pages 94 to economic, environmental and social topics committees of the highest governance body. Identify any committees 96. All Board committees play a role, although the responsible for decision-making on economic, environmental and Social, Ethics and Sustainability Committee has G4-47 Report the frequency of the highest governance body’s review of At least quarterly social impacts primary responsibility for sustainability matters economic, environmental and social impacts, risks, and opportunities G4-35 Report the process for delegating authority for economic, Executive responsibility has been delegated G4-48 Report the highest committee or position that formally reviews and Not applicable in the current year, as material environmental and social topics from the highest governance body to to Mr Thava Govender, Group Executive: approves the organisation’s sustainability report and ensures that all Aspects are not reported on, although the senior executives and other employees Transmission and Sustainability, who reports to material Aspects are covered Social, Ethics and Sustainability Committee the Group Chief Executive is responsible for ensuring the integrity of information presented G4-36 Report whether the organisation has appointed an executive-level Executive responsibility has been delegated position or positions with responsibility for economic, environmental to Mr Thava Govender, Group Executive: G4-51 Report the remuneration policies for the highest governance body Remuneration structure, page 98 and social topics, and whether post holders report directly to the Transmission and Sustainability, who reports to and senior executives for different types of remuneration, and how highest governance body the Group Chief Executive performance criteria in the remuneration policy relate to the highest governance body’s and senior executives’ economic, environmental G4-37 Report processes for consultation between stakeholders and the Consultation with stakeholders has been and social objectives highest governance body on economic, environmental and social delegated to the Stakeholder Relations topics. If consultation is delegated, describe to whom and any Department, which reports to the Board on a G4-52 Report the process for determining remuneration, and whether Our approach to remuneration, page 98 feedback processes to the highest governance body quarterly basis remuneration consultants are involved G4-38 Report the composition of the highest governance body and its Racial and gender equity of the Board of Ethics and integrity committees by executive or non-executive; independence; tenure on Directors is noted on pages 20 and 21, as are G4-56 Describe the organisation’s values, principles, standards and norms of Ethics in Eskom, pages 93 and 94 the governance body; number of each individual’s other significant other significant commitments behavior such as codes of conduct and codes of ethics positions and commitments, and the nature of the commitments; Directors are appointed by the Minister of Public gender; membership of under-represented social groups; Enterprises; no stakeholders other than the G4-57 Report the internal and external mechanisms for seeking advice on Code of Ethics, page 94 competencies relating to economic, environmental and social impacts; shareholder are specifically represented on the ethical and unlawful behavior, and matters related to organisational stakeholder representation Board integrity, such as helplines or advice lines G4-39 Report whether the Chair of the highest governance body is also an The Chairman is an independent non-executive G4-58 Report the internal and external mechanisms for reporting concerns Code of Ethics, page 94 executive officer director about unethical or unlawful behavior, and matters related to organisational integrity, such as escalation through line management, G4-40 Report the nomination processes for the highest governance body Board constitution and appointments, page 94 whistleblowing mechanisms or hotlines and its committees, and the criteria used for nominating and selecting Board committees, page 95 highest governance body members (including diversity, independence, expertise and experience relating to economic, environmental and social topics, and how stakeholders are involved) Supplementary information G4-41 Report processes for the highest governance body to ensure conflicts Code of Ethics, page 94 of interest are avoided and managed. Report whether conflicts of interest are disclosed to stakeholders 128 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 129 Compliance with Promotion of Access to Information Act Contact details This fact sheet contains our declaration in terms of Section 32 of the Promotion of Access to Information Act, 2000 Telephone numbers Websites and email addresses (PAIA) for 2016/17. Eskom head office +27 11 800 8111 Eskom website www.eskom.co.za The statistics required by South African Human Rights Commission are as follows: Contact@eskom.co.za 2016/17 Eskom Media Desk +27 11 800 3304 Eskom Media Desk MediaDesk@eskom.co.za +27 11 800 3309 a. The number of requests for access received 67 +27 11 800 3343 +27 11 800 3378 b. The number of requests for access granted in full 8 +27 82 805 7278 c. The number of requests for access refused in full 6 Investor Relations +27 11 800 2775 Investor Relations InvestorRelations@eskom.co.za d. The number of requests for access refused partially 25 Eskom Corporate Affairs +27 11 800 2323 Eskom integrated results www.eskom.co.za/IR2017 e. The number of requests for access in process 18 Toll-free Crime Line 0800 112 722 Feedback on our report IRfeedback@eskom.co.za f. The number of internal appeals lodged 6 Eskom Development Foundation +27 11 800 6128 Eskom Development Foundation www.eskom.co.za/csi CSI@eskom.co.za g. The number of internal appeals in process – National Sharecall number 08600 ESKOM or Promotion of Access to PAIA@eskom.co.za h. The number of cases in which access was given as a result of internal appeal 3 08600 37566 Information Act requests i. The number of internal appeals lodged on the grounds that a request was regarded as having been refused in terms 2 Customer SMS line 35328 Integrated demand management AdvisoryService@eskom.co.za of Section 27 and energy advice j. The number of applications ending up in court – CS (customer service) mobile Dial *120*6937566# or Customer Service CSOnline@eskom.co.za k. The number of cases in which extension of 30 days were requested 46 *120*myeskom# MyEskom mobi-site www.myeskom.co.za MyEskom app Eight formal requests were rejected as they were not in line with the requirements of the Act, while two were deferred. Facebook EskomSouthAfrica Twitter Eskom_SA In addition to these formal requests, we also dealt with informal requests lodged via the PAIA Portal, not in terms of the Act. Physical address Postal address Our PAIA manual is available on Eskom Megawatt Park PO Box 1091 http://www.eskom.co.za/OurCompany/PAIA/Pages/Promotion_Of_Access_To_Information.aspx 2 Maxwell Drive Johannesburg Sunninghill 2000 Sandton 2157 Group Company Secretary Company registration number Ms Suzanne Daniels Eskom Holdings SOC Ltd Office of the Company Secretary 2002/015527/30 PO Box 1091 Eddie Laubscher Johannesburg National Deputy Information Officer 2000 Eskom Holdings SOC Ltd 15 June 2017 Supplementary information 130 Integrated report | 31 March 2017 Eskom Holdings SOC Ltd 131 Our suite of reports 5000138E Eskom Dev Foundation Redesign - Social Our 2017 suite of reports comprises the following: Integrated report and supplementary information The integrated report, which provides an overview of our performance, is prepared in accordance with the IIRC’s International Framework, and subject to combined assurance. Supplementary information, pertinent to interested stakeholders, is available at the back of the report. Annual financial statements The consolidated financial statements of Eskom Holdings SOC Ltd have been prepared in accordance with International Financial Reporting Standards (IFRS) as well as the requirements of the Public Finance Management Act, 1999 and Companies Act, 2008, and are audited by our independent auditors. Foundation report The Eskom Development Foundation NPC (the Foundation) is responsible for the coordination Foundation report 31 March 2017 and execution of our corporate social investment activities in support of our business imperatives. The report details the operations and activities of the Foundation for the 2016/17 year. The Foundation will be absorbed into Eskom from 1 April 2017, although our CSI initiatives Enabling economic growth will continue. All documents are available online at www.eskom.co.za/IR2017 Forward-looking statements Certain statements in this report regarding Eskom’s business operations may constitute forward-looking statements. These include all statements other than statements of historical fact, including those regarding the financial position, business strategy, management plans and objectives for future operations. Forward-looking statements constitute our current expectations based on reasonable assumptions, data or methods that may be incorrect or imprecise and that may be incapable of being realised, and as such, are not intended to be a guarantee of future results. Actual results could differ materially from those projected in any forward-looking statements due to various events, risks, uncertainties and other factors. Eskom neither intends to nor assumes any obligation to update or revise any forward-looking statements, whether as a result of new information, Energy is never lost future events or otherwise. It’s simply transferred See the good our energy is doing Eskom is a supporter member of Development Foundation Eskom Development Foundation NPC PO Box 1091 Johannesburg 2000 Tel +27 11 800 8111 Email csi@eskom.co.za www.eskom.co.za/csi Reg No 1998/025196/08 132 Integrated report | 31 March 2017 11 8 9